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Daily Newsletter, Sunday, 05/26/2002

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The Option Investor Newsletter Sunday 05-26-2002
Copyright 2001, All rights reserved. 1 of 5
Redistribution in any form strictly prohibited.
Entire newsletter best viewed in COURIER 10 font for alignment
Posted online for subscribers at http://www.OptionInvestor.com
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MARKET WRAP (view in courier font for table alignment)
******************************************************************
WE 5-24 WE 5-17 WE 5-10 WE 5-3
DOW 10104.26 -248.82 10353.08 +413.16 9939.92 - 66.68 + 95.88
Nasdaq 1661.49 - 79.90 1741.39 +140.54 1600.85 - 12.15 - 50.89
S&P-100 539.92 - 13.38 553.30 + 30.06 523.24 - 7.28 - 1.85
S&P-500 1083.82 - 22.77 1106.59 + 51.60 1054.99 - 18.44 - 2.89
W5000 10250.64 -223.54 10474.18 +456.71 10017.47 -184.57 - 5.42
RUT 493.64 - 15.30 508.94 + 16.21 492.73 - 19.59 + 10.82
TRAN 2743.67 - 54.69 2798.36 +155.26 2643.10 -100.46 + 20.93
VIX 21.16 + .88 20.28 - 4.75 25.03 + 1.80 - 1.41
VXN 42.86 - .08 42.94 - 7.79 50.73 + 4.47 + 4.02
TRIN 1.59 0.78 2.56 1.71
TICK +286 +651 +364 +910
Put/Call .82 .72 .83 .91
******************************************************************
Indian Givers?
by Jim Brown
The +413 point gain for the Dow last week was followed by a -248 loss
this week. The +140 Nasdaq gain shrank with a -80 point loss this
week. Bears took back the gifts from last week on mixed economic
reports, terrorist warnings, downgrades and cautious guidance from
tech companies. The bulls tried to circle the wagons several times
on Friday but were unable to shake off the urge to go home flat.
Economically the week was mixed. The Durable Goods orders were up
strongly but the GDP dropped instead of gaining as expected. New
Home Sales rose higher than expected while Retail Sales slipped.
Terrorist warnings were issued for buses, trains and even attacks
by scuba divers. Scuba divers? The markets did not know which way
to turn and simply ended up going in circles instead. The typically
bullish pre-holiday week ended with the Dow, Nasdaq and S&P threatening
to break critical support levels of 10100/1660/1080.
On Friday the GDP report soured the day with a downward revision to
+5.6% growth when analysts had expected an upward revision to +6.0%.
A couple months ago traders would have traded their first born for
a GDP over +3% but suddenly a measly +5.6% was not good enough. The
news it appears was already priced in. The culprits were a downward
revision in consumer and business spending. Inventory investment was
revised upward meaning sales were not keeping pace with manufacturing.
These numbers are for the 1Q, which is ancient history for traders.
Analysts are now expecting the 2Q GDP to be more in the +2% to +3%
range. While this is decent growth it is not enough to support the
gains in the market according to (bearish) analysts. The bullish
view of course is that the recovery is underway and yes, we know it
is slow but it is growth. Expect this debate to be argued for months
to come.
The New Home Sales posted another strong month with 915,000 annualized
sales for the month of April. The consensus estimate was only 880,000.
High end home sales, over $300,000, were strongest. There was no
evidence of any pullback and with the economy still weak the Fed is
not likely to raise rates anytime soon. The mortgage rates dropped
below 7% again this week.
The big news for the week was a series of downgrades on techs.
There were two separate downgrades on the software sector
this week prompted by no growth in IT spending. Almost every stock
was named in these cautious comments. As if that was not enough
Goldman took on the chip equipment sector on Friday with a
downgrade on a weaker outlook. They used the AMAT comments of +50%
growth in orders this quarter compared to only a +10% to +15%
expected growth for 3Q as evidence that the inventory replenishment
cycle had run its course. The SOX dropped -7.6% for the week after
leading the tech rally last week. Solomon Smith Barney disagreed with
the Goldman downgrade saying the book-to-bill was evidence the
recovery was gaining speed. Goldman countered saying the saturation
of manufacturing capability would hinder profit growth for some time.
Stock prices are rich with the AMAT TTM PE over 60 and NVLS over 50.
The lack of business did not keep SUNW from affirming estimates
for this quarter but they did it on cost cutting not an increase
in sales. They said in the analyst call on Thursday that order
flow was not as smooth as the first quarter. (translation = we
are having trouble closing sales and things are really tight)
Another indicator of the weakness in business spending was the
next round of layoffs begun by IBM. IBM said an unspecified
number of workers were laid off this week at various computer
manufacturing plants. An industry official said over 1000
workers were cut at server plants. Insiders who claim to know
what is coming claim IBM is going to cut as many as 9,540 jobs.
You can bet that ANY growing strength in business orders would
have prevented IBM from cutting thousands of highly skilled
workers at this stage in the economic recovery.
Despite the negative news above First Call is claiming that they
are seeing many more positive pre-announcements and fewer earnings
warnings than they expected. The federal government released an
obscure report that said information from nearly five million
small business tax returns showed profits to by up +.9%. This
was for the same period that the S&P showed a -11.5% drop in
earnings. Let's hope the Feds are right and there is a stealth
recovery in progress. With all the earnings for the last couple
quarters coming from cost cutting any top line growth should go
directly to the bottom line. Now that would be a problem traders
would like to have.
Planes, trains, buses and scuba divers? I think somebody has
gone a little far in this CYA process. In an effort to cover
all the bases the government issued yet another warning that
terrorists could use scuba equipment to infiltrate our borders
and harbors to execute attacks. There are many opportunities
to make fun of this warning, but I will leave that up to your
imagination. It is a serious matter but scuba divers? What is
next? Hot air balloons?
The Pakistan/Indian conflict is heating up again. Pakistan warned
everyone that they would be conducting a series of missile tests
over the weekend in the Kashmir area. Let's see. You have countries
shelling each other on a daily basis and you announce impending
missile tests in the area. Does that sound a little strange? Either
way the tension is not doing our markets any good. Neither is the
peace, or lack thereof, in Israel. Suicide bombings are escalating
again despite Arafat's request to stop. The combination of world
events has acted to produce a run on gold which hit $320 an ounce
this week. The gold bugs must be in heaven and I have heard several
comments about $500 gold soon. Right, and oil will be $30 a barrel.
Oh, it is almost $30 already? Pass the Krugerands!
The pundits on stock TV were continually commenting that the
market drop was immaterial since it came on the lightest volume
day and week of the year. I bet that is comforting to know for
everyone who bought calls last week. Surely your options did not
go down "because the low volume does not count", right? Just joking
here but I don't care if it is 100,000 shares or one billion shares
a drop is a drop and your money is lost. What they are trying to
get across is that there is no conviction to this drop. It is not
like there was a flood of sellers, there were just no buyers.
Nobody wanted to buy and hold over the long weekend with terrorist
warnings in the air and daily broker downgrades.
The battle is underway in the markets. The bulls are becoming a
little braver and critical support levels were rallying points
on Friday afternoon. Dow 10100, Nasdaq 1660, S&P 1080. The few
sellers left on the trading floor in late afternoon tried to
break those levels and were unsuccessful. There are buyers out
there, just not in sufficient strength to mount a rally. They
are bargain hunting on each pullback. The advance/decline ratio
was negative most of the day but it struggled to almost neutral
in early afternoon even as the markets were falling. The TRIN at
1.69 is in bullish territory and indicating an oversold condition.
The VIX is not cooperating however and hit a low of 20.60 during
the days drop. The buyers are out there but they are just outnumbered.
With the summer doldrums ahead it is likely that we will trade
sideways between 9800 and 10300 for sometime. Check out the Index
Trader wrap this weekend for a full update of support/resistance
areas and the market outlook for next week. Our biggest contrarian
indicator, Ralph Acompora, came out of hiding and was a guest on
the Rukeyser show Friday night. He was very careful to say he was
clueless about the Nasdaq direction and was very vague in his
answers. Darn, he must be on a short leash at Prudential these
days.
It is with great pleasure that we announce our fall seminar in Denver.
It will be October 12th to 15th with an optional boot camp on Friday
the 11th for those that would like a better foundation in the basic
strategies. We will announce the speaker list in the coming weeks
but you know we always have 12-15 well known personalities including
your favorite Option Investor writers. What I can tell you is that
we will start the event off on Friday night with a casino party with
craps, roulette, black jack, etc. This get acquainted event will
offer prizes for everyone and provide a relaxed atmosphere to rub
shoulders with the speakers and other guests. Ask anybody who has
been to one of our seminars. We start at 9:am Saturday morning and
run non-stop until the close. We stop only to eat and sleep but we
do feed you five times a day! You can save $200 off the registration
price if you sign up before July-31st. Don't wait.
Click here: http://www.OptionInvestor.com/seminar/fall2002/
Enter Very Passively, Exit Aggressively!
Jim Brown
Editor
********************
INDEX TRADER SUMMARY
********************
TECH & TERROR BLUES
by Leigh Stevens
TRADING ACTIVITY AND OUTLOOK -
A number of money managers, investors and talking media heads
this past week thought that there would be upside follow through
to the strong rebound that occurred the week before. Which by the
way, was the best weekly gain since September in the S&P and the
best in a year in Nasdaq. But, WRONG! There was instead another
tech wreck. The S&P stocks seem to be developing a path of least
resistance to the upside, but they can't rally in isolation
without some participation by tech stocks. More downgrades of
earnings estimates, such as for the semiconductors, put the lid
on any impulse by investors to buy the former tech darlings.
AND, of course we had the steady drumbeat of terror warnings,
which seemed to rise in proportion to the criticisms of how
potential clues to the 9/11 attack might have been ignored.
Seems that middle eastern men wanting to learn to fly big
commercial jets once airborne only, without bothering to get them
back down, was noticed but the report did not go up the chain of
command. Seems that the stupidity of the hijackers in making NO
secret of this highly unusual desire was matched by the lack of
any suspicion that this raised - only in America! I have a
personal ire in this, as 670 of my Cantor Fitzgerald friends and
colleagues died as a result. Anyway, the talk of more of the same
has made investors and traders nervous to say the least.
In terms of trade strategy, I favor buying S&P index calls to
participate in the upside that should follow what I think is a
bottoming process, that is not the trade of the day - rather more
of a position play by going out to July options for example to
give sufficient time for the unfolding of a larger trend.
Volatility is low, as has been commented on extensively, so
premiums are not hugely inflated.
AM OUT OF THE OFFICE TUES AND WEDNESDAY, BACK IN ON THURSDAY
(5/30), WHEN I RESUME MY COMMENTARIES.
S&P 500 (SPX) Daily/Hourly charts:
I've also been commenting about the readings on the daily
stochastic model as seen above left, being closer to the high
"overbought" side than the low "oversold" end of the scale.
Given the tendency for the back and forth price swings that tend
to be part of this situation, it appears that the appropriate
strategy is to buy in what appears to be a zone of support, on a
scale down basis. Trying to hit the exact level is far more
difficult, especially in end of the day commentary, than to pick
a "zone" of support. It seems that this area is 1075 to 1090 in
the S&P 500 (SPX).
As good strategy also always recognizes the worst possible case,
I would say that that risk is for another leg down to the prior
1054 low, so either use an exit at 1070 or be willing to price
average again in that area - this, not for the feint of heart and
also a strategy I would only follow when in a market that is
oversold on a weekly longer-term trend basis, as suggested on the
weekly charts below.
Since the appropriate outlines to the hourly chart trend channel
outs are still shifting around, suggest you key off from the
prior upswing highs and downswing lows more than anything, as
potential support and resistance area -- noted on the charts.
However, the closes (in the black box) correspond to the low end
of the tentative up trendlines - tentative while an up trend line
is still uncertain or still being established. I would make more
note of either the horizontal line from the low end of the chart
gaps or a "line" of prior lows - whichever is present, and
appropriate.
I suggested, buying SPX calls at 1090 and I am looking for
another opportunity to buy some more as close to 1075 as we get
next week. It’s also possible we get another minor rally,
followed by another downswing and so on, but not sink a whole lot
lower than already seen, especially while closing prices are
hugging the 21-day day moving average.
S&P 500 (SPX) Weekly chart:
I used this weekly chart in last night's market wrap for Option
Investor and talked about the likelihood that the pattern
outlined was that of a chart formation known as a Head and
Shoulders bottom (sometimes called an inverse head and
shoulders). I will provide a more in-depth explanation of this
pattern for those who would like to know more about what it means
in technical analysis and what it may be telling ups about a
potential major trend reversal. I provide this explanation at the
bottom of this column for those who want to read it.
The recent rally has occurred from an oversold extreme on a
weekly chart basis, as measured by the recent low reading on the
8-week stochastic. This indicator formula looks at where the
index is relative to the highest high and lowest low of the prior
two months.
S&P 100 (OEX) Daily/Hourly charts:
Buy zone for accumulation of OEX calls for the turnaround that I
anticipating begins at 541-542 area and extends to 536 - rather
than the exit/stop at 536 I suggested Thursday, would suggest
risking to 529.50. But for those with deeper pockets, I would be
willing to price pick up an added position as low as to the 522
area, if that level was re-tested again. I am painting broad
strategy strokes here.
The weekly oscillators show the same oversold extreme as the SPX.
Dow Industrials 1/100 Index ($DJX.X) Daily/Hourly charts:
I favor accumulation of longer-term DXJ call positions in the 101
area, extending down to 100. Rather than exit at 100, suggest
further accumulation in this area, if reached. A close at or
udder 99 would be an exit point for those who want to work with a
certain stop point. Further positions could be taken on a
"breakout" move above the key line of resistance at 102.2. If so,
short-term traders could exit at 103.5 for a trade. Otherwise, I
am holding out for a 105 objective.
Nasdaq Composite Index ($COMPX) Daily/Hourly charts:
Nasdaq is the high-risk party boy of the indices. Not that the
rest do not have risk of your losing your premium, but the Nas is
the wild child. If the emerging hourly up trendline does not
indicate any meaningful support at the Friday close, look for
support at 1652; then, if exceeded, in the low-1640 area - absent
some major calamitous event. I'm talking always about "normal"
market (bearish or bullish) influences.
Momentum players could buy into, or additionally, on a decisive
upside penetration of key near overhanging resistance at 1697.
Next resistances are at: 1705, 1715 and 1730 - more major
resistance comes in at the prior 1760 high.
Nasdaq Composite Index ($COMPX) Weekly chart:
Nasdaq has been reversing at its weekly down trendline, which
comes into play next week at 1712. Needless to say an upside
penetration of this resistance is needed to suggest that a major
trend reversal was underway.
Two other noteworthy aspects of the COMP weekly chart is the same
head and shoulders bottom pattern, "outlined" and discussed for
the S&P weekly chart. The low of 3 weeks ago came after
completion of a 75% retracement, which is significant in that it
suggested that a 100% retracement would not necessarily be seen -
otherwise we would be looking at possible double bottom low
rather than a head and shoulders bottom pattern. Finally, even on
the longer term moving average (length: 13), I use on my weekly
charts, this market is at an oversold extreme.
Nasdaq 100 (NDX) Daily/Hourly charts:
I'll do my commentary based on the QQQ chart below, but would
note the (dashed blue) gap line at 1245 in NDX, which has been an
area of support. 1234 is the recent low - buy any apparent
reversal that comes in that area. 1285 is a key near resistance
level and breakout point if pierced.
Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts:
Anyone who bought the 31 area per my suggestion, maintain a stop
at 30.5 as you wish. I myself am inclined not to stop on long
calls there, as I'm willing to accumulate a second half of a
position if 29.5 was re-tested, my "worst case" scenario right
now.
31.9-32 is key near resistance and potential breakout point, at
least for a move to 33. 33.6, if cleared would be an important
breakout move. Significant resistance starts at 34 and extends to
35.
ADDENDUM - THE HEAD & SHOULDERS BOTTOM:
There is no magic in this or any of the other patterns. In this
pattern, first comes a low formed because selling dries up to
some extent and buying comes in. A subsequent rally eventually
attracts renewed selling and there is another decline to lower
than before and investors get more bearish. Eventually, buyers
come in again as they perceive value. There is another rally,
but also in the end this one fails also - a bear market does not
end quickly. However, this time this third low is approximately
in the same area as the first bottom.
At this juncture, the 3rd. bottom formation is showing the
establishment of a "value" area for stocks and the stage is set
for a more prolonged reversal, typically due to a basic change in
the earnings potential related to stocks.
There is a measuring technique that can be applied to a head and
shoulders pattern. In H&S bottom pattern, a trendline is drawn
through the top of the first rebound from the first cluster of
lows (the left shoulder), which becomes the initial point of a
"neckline". This line (neckline) then connects to the top of the
second rally that develops from the lowest cluster of lows (the
head). We then have at least two points to draw a line and that
line has the relative position of the “neckline” of a human
figure.
Taking the price that represents the top of the (upside down)
head, which is the lowest low and measuring the price on a
vertical line where it intersects the neckline, provides a value.
Add this value to the point where prices achieve an upside
penetration of the neckline after the formation of the third
cluster of lows (the right shoulder). This vertical measurement
then provides a minimum objective on the upside. For example, if
there was a move in 2 weeks above 1133 or above the neckline,
this vertical measurement from the point where SPX penetrates the
neckline, would suggest a minimum potential objective to around
1445 - approximately equal to a 50% retracement of the decline
from the March '00 top.
The measuring convention for a head and shoulders objective
should not be taken as an absolute. This measuring rule implies
a minimum objective only and once a trend develops the overriding
principle is to stay with the trend as long as it continues.
However, a significant value is provided by this measuring
technique in that an initial price objective can be established.
The second point regarding price objectives is that the actual
upside or downside potential of these top or bottom formations
may not be quite as much by using the "standard" technique
described. Thomas Bulkowski in his “Encyclopedia of Chart
Patterns” found that the most likely rise for head and shoulder
bottoms, once the neckline was penetrated, was between 20 and
30%.
Another aspect to the head and shoulders pattern is that it has
been found to have one of the more predictable outcomes as
patterns go. For example, Bulkowski found that 93% of the head
and shoulders top formations he studied broke out to the downside
(penetrated the neckline) once they had formed. This suggests as
a trading strategy, that when the formation of the right shoulder
is apparent, going long on formation of a H&S bottom and short in
an instance of the H&S top pattern – and to not necessarily wait
for a "confirming" penetration of the neckline.
After the right shoulder has formed, if instead SPX started into
a steep fall again (a new down leg) and the bottom of the
"inverted" head was exceeded, it constitutes a pattern failure. A
pattern failure means that the pattern failed to have the
expected and common outcome in terms of a further price movement.
Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com
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**************************************************************
**************
Editor's Plays
**************
Old Favorite Revisited
Several times in the past I have profiled this stock with
good results. It is setting up for a high odds trade again.
I have suggested several different strategies.
Providian Calls
PVN has traded as low as $2.00 back in November and as high as
$8.49 in April. I profiled this stock as a rebound candidate
in the $3.00 range and again around $5.00. After a significant
move to near $8.50 it met with significant selling due to profit
taking, market weakness and various other factors. After selling
off to nearly $6.00 it is rebounding again. On Friday it was one
of the few stocks to post a gain. I still think it has resistance
at $8.50 but a break over that level would produce significant
short covering. It is evident that PVN is going to survive and
could even move back into its previous trading range well over
$20.
The play I am suggesting here requires time. Buying May options
will not work. There could be another failure at $8.50 before
it gathers enough speed to hurdle that barrier. This means you
need to go farther out and probably use the $10 strike price.
Use your own judgment.
I profiled the Sept-$10 call at $.55 cents and the Jan-03
$10 call at $1.10. I like the January call because of the time.
If we get a breakout over $8.50 the stock could run several
dollars and once above $10 could draw serious short covering.
The Sept $10 call for $.55 cents is more like gambling but the
stakes are very low. This is a lottery play that will either
expire worthless or go for 200% to 500% gain. Nobody knows.
Another way to play this would be to sell the Jan-03 $15 put
naked for the current bid of $7.20. ANY CLOSE over $7.85 for
PVN at January expiration would result in a profit. A close
over $15.00 would result in a full profit of $7.20 but you
could be capped at that point. That is the most you can make.
Want more gains?
You could also sell the Jan-$10 put for the current ask of $2.95
and use the proceeds to buy twice as many Jan-$10 calls for the
$1.10 shown above. This gets you into the trade for free and even
puts a little cash into your account. If PVN closes over $10 in
January your put expires worthless and the calls are worth the
difference between $10 and the current stock price. If PVN was
$15 your calls would be worth $5 each and if you bought two
contracts for every put you sold then you would have a $10 per
share profit and your cost was zero.
You want to live dangerously?
Sell the $15 put for the $7.20 ask and buy 6 $10 call contracts
@ $1.10 for every put you sold. That would protect you from loss
on the put as long as PVN closed over $10 in January. The value
of your calls would offset any shortage on the put. If PVN closed
at $15 the put would expire worthless and the calls would be worth
$30 (6 x $5). Not a bad profit for a free trade!
If PVN closed at $11 your put would cost you $4 to buy back
but the calls would be worth $6 for a profit of $2. Your breakeven
price is about $10.75. Anything over is a profit, anything under
and you own the stock with a basis of $15.
Now, your only challenge is deciding where PVN will close in January!
It is rumored to be a buyout candidate as well.
Disclosure: I own PVN stock and options at this time.
***********************
Remember, these are all high risk plays and should only be made
with 100% risk capital.
Good Luck
Jim Brown
****************
MARKET SENTIMENT
****************
Third Time's A Failure
By Eric Utley
They tried to ramp the market into the close for the third
consecutive session late Friday, but couldn't muster the strength
to do so. The whole idea seemed a bit too cute for me. But
they tried nonetheless. There was a big battle that took place
between the bulls and bears late Friday; between those wanting
to be in cash over the three day weekend, and those wanting to
be in the market for a potential relief rally next Tuesday
morning.
We saw a blip higher in the CBOE Market Volatility Index
($VIX.X), but nothing of significance. With the Dow Jones
Industrial Average ($INDU) slipping by triple digits, and the
S&P 500 (SPX.X) losing more than a percent, I would have
expected that the VIX would've closed at least above 22. But
it didn't. Heck, it didn't even trade the high during the
day. But that's what we're left with, a complacent market.
My sector scorecard was about as red as it gets. With the
fractional exception of the Airline Index (XAL.X), everything
that I track for this column was in negative territory. There
were a couple of three percent plus dips in the technology
sector thanks to the Semiconductor Index (SOX.X) and the
Biotechnology Index (BTK.X). These two were the leaders of
the Nasdaq not too long ago, so their deterioration during the
last several weeks, I think, bodes poorly for the broader
Nasdaq moving into the summer. But just how we get there
remains to be seen.
Next week is historically one of the most bullish weeks of
the year as Memorial Day officially kicks off the summer
season. So the deterioration that we've observed in some
segments of the market, especially technology, may be
temporarily overlooked if the historical trends take over.
S&P commercials seemed to be betting along with the historical
trends as the group reduced its net bearish position by about
5,000 contracts during the most recent reporting period. In
contradiction to that movement, though, we saw another jump
in the S&P small traders bullish position to just below that
group's yearly high.
Finally, and very much anecdotally, I noticed a few interesting
numbers in the put/call ratios Friday. Normally I don't like
to view the data from such a micro perspective. But I found
the OEX put/call ratio -- the index in which the
institutional crowd likes to play around -- finished at 1.00
Friday, or neutral. Meanwhile, the QQQ, where the retail crowd
likes to hang out, put/call ratio finished Friday at 0.27.
That's right, 0.27. Needless to say, the cubers are leaning
bullish going over the weekend.
-----------------------------------------------------------------
Market Averages
DJIA ($INDU)
52-week High: 11350
52-week Low : 8062
Current : 10104
Moving Averages:
(Simple)
10-dma: 10211
50-dma: 10207
200-dma: 9898
S&P 500 ($SPX)
52-week High: 1316
52-week Low : 945
Current : 1084
Moving Averages:
(Simple)
10-dma: 1091
50-dma: 1109
200-dma: 1118
Nasdaq-100 ($NDX)
52-week High: 2071
52-week Low : 1089
Current : 1253
Moving Averages:
(Simple)
10-dma: 1285
50-dma: 1342
200-dma: 1452
Airline ($XAL)
The XAL was the best performing index on my list Friday. The
group finished 0.04 percent higher.
Leaders to the upside included U.S. Airways (NYSE:U), UAL
(NYSE:UAL), Northwest Airlines (NASDAQ:NWAC), AMR (NYSE:AMR),
and Delta Airlines (NYSE:DAL).
52-week High: 152
52-week Low : 59
Current : 81
Moving Averages:
(Simple)
10-dma: 82
50-dma: 95
200-dma: 93
Biotech ($BTK)
What a reversal here. Maybe Thursday's move was, after all, not
much more than short covering ahead of the Biogen (NASDAQ:BGEN)
event. In any case, the BTK earned the worst performing sector
spot Friday with its 3.57 percent giveback.
Leading individual movers to the downside included Protein
Design Labs (NASDAQ:PDLI), Millennium (NASDAQ:MLNM), Sepracor
(NASDAQ:SEPR), and Genzyme (NASDAQ:GENZ).
52-week High: 676
52-week Low : 375
Current : 416
Moving Averages:
(Simple)
10-dma: 413
50-dma: 456
200-dma: 509
-----------------------------------------------------------------
Market Volatility
The VIX rebounded ahead of the holiday weekend, but I didn't see
any meaningful fear build in the index. The slide was only a
reaction to the weakness in stocks.
The VXN, by my estimation, trades with a bit more fear still,
which makes sense because of the horrible position in which the
tech sector finds itself, fundamentally speaking of course.
CBOE Market Volatility Index (VIX) - 21.28 +0.93
Nasdaq-100 Volatility Index (VXN) - 43.61 +0.41
-----------------------------------------------------------------
Put/Call Ratio Call Volume Put Volume
Total 0.82 300,464 245,610
Equity Only 0.59 257,679 152,740
OEX 1.00 12,617 12,627
QQQ 0.27 17,345 4,689
-----------------------------------------------------------------
Bullish Percent Data
Current Change Status
NYSE 63 + 0 Bull Confirmed
NASDAQ-100 40 - 1 Bull Correction
DOW 67 + 0 Bear Correction
S&P 500 64 + 0 Bull Confirmed
S&P 100 66 + 0 Bear Correction
Bullish percent measures the number of stocks in an index
currently trading on a buy signal on their point and figure
chart. Readings above 70 are considered overbought, and readings
below 30 are considered oversold.
Bull Confirmed - Aggressively long
Bull Alert - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert - Take defensive action if long
Bear Confirmed - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend
-----------------------------------------------------------------
5-Day Arms Index 1.09
10-Day Arms Index 0.97
21-Day Arms Index 1.28
55-Day Arms Index 1.26
Extreme readings above 1.5 are bullish, and readings below .85
are bearish. These signals don't occur often and tend be early,
but when the do, they can signal significant market turning
points.
-----------------------------------------------------------------
Market Internals
Advancers Decliners
NYSE 1238 1896
NASDAQ 1250 2126
New Highs New Lows
NYSE 90 16
NASDAQ 73 62
Volume (in millions)
NYSE 888
NASDAQ 1,206
-----------------------------------------------------------------
Commitments Of Traders Report: 05/21/02
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.
Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.
S&P 500
S&P commercials added more longs than shorts last week, resulting
in an decrease in the group's net bearish position. Small traders
did just the opposite for a net increase in their bullish
positions. Small traders are less than 2,000 contracts away from
their most bullish reading of the year.
Commercials Long Short Net % Of OI
05/07/02 348,019 422,801 (74,782) (9.7%)
05/14/02 343,941 424,893 (80,952) (12.1%)
05/21/02 354,039 429,803 (75,764) (9.7%)
Most bearish reading of the year: (111,956) - 3/6/01
Most bullish reading of the year: ( 36,481) - 10/16/01
Small Traders Long Short Net % of OI
05/07/02 154,664 59,583 95,081 44.4%
05/14/02 163,035 58,587 104,448 49.8%
05/21/02 164,964 58,950 106,014 47.3%
Most bearish reading of the year: 36,513 - 5/01/01
Most bullish reading of the year: 107,702 - 3/26/02
NASDAQ-100
Nasdaq commercials grew slightly more bullish last week with
a gain of 1,000 contracts to their net bullish position. Small
traders on the other hand grew more bearish by adding to their
existing chunk of shorts.
Commercials Long Short Net % of OI
05/07/02 38,338 39,152 (814) (1.1%)
05/14/02 40,858 35,761 5,097 (5.5%)
05/21/02 51,448 45,375 6,073 (6.3%)
Most bearish reading of the year: (15,521) - 3/13/01
Most bullish reading of the year: 7,774 - 12/21/01
Small Traders Long Short Net % of OI
05/07/02 13,229 13,161 68 0.3%
05/14/02 11,920 17,479 (5,559) 8.2%
05/21/02 12,567 19,899 (7,332) 22.6%
Most bearish reading of the year: (9,877) - 12/21/01
Most bullish reading of the year: 8,460 - 3/13/01
DOW JONES INDUSTRIAL
Dow commercials grew less bullish last week by reducing their
long position and adding to their short position. Small
traders remained flat in their actions.
Commercials Long Short Net % of OI
05/07/02 19,967 14,045 5,922 17.4%
05/14/02 21,080 14,725 6,355 14.4%
05/21/02 20,173 15,317 4,856 13.7%
Most bearish reading of the year: (8,322) - 1/16/01
Most bullish reading of the year: 15,135 - 10/16/01
Small Traders Long Short Net % of OI
05/07/02 5,124 9,831 (4,707) (31.5%)
05/14/02 4,930 10,899 (5,969) (25.2%)
05/21/02 3,661 9,585 (5,924) (44.7%)
Most bearish reading of the year: (8,777) - 10/12/01
Most bullish reading of the year: 1,909 - 1/16/01
-----------------------------------------------------------------
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Another Goodbye
By Eric Utley
Late last December I thought my QCharts was acting up on me when
it failed to retrieve a quote for the Insurance Sector Index,
which traded on the CBOE. Later on in the day, after
frustration mounted, I called the CBOE only to discover that the
sector had ceased trading. The spokesperson added that the
Chemical Sector Index had stopped trading as well.
Wouldn't you know it, the CBOE did it again. This time, the
exchanged stopped pricing the Retail Sector Index (RLX.X). It
happened about two weeks ago. So don't blame QCharts for their
poor data feed. There's no data to feed for the RLX anymore.
For sector analysts like myself, the loss of an important
consumer metric like the RLX is a pain. But to combat my loss,
I've begun to track the daily fluctuations of several bellwethers,
including Wal-Mart (NYSE:WMT), Home Depot (NYSE:HD), and Kohl's
(NYSE:KSS), among of few others. It's my best solution for now.
The point and figure charts that appear in this column were
created using www.StockCharts.com.
Please send your questions and suggestions to:
Contact Support
----------------------------
Brocade (NASDAQ:BRCD)
What's going on with BRCD? It seems like a good short to me
if it breaks down. Thanks for the hard work. - William
Thanks for the question and compliment, William.
I've been shorting BRCD with a great deal of success over the last
two months, as well as owning puts from time to time. For the
purposes of disclosure, I have no position in BRCD at the time
of publication.
Call it lucky, but this stock has been incredibly easy to short
over the last two months. It's been too easy, which always makes
me nervous.
There have obviously been some fundamental issues at play because
a stock normally does not shed 10 points, or about 30 percent, in
the space of a few months without some sort of shift in investor
sentiment or change in its business. The company's last quarter
was actually pretty strong, but I think investors began to bring
into question the valuation of its shares after learning of
management's future expectations for growth. And of course the
blow-ups at the big box makers such as Sun Micro (NASDAQ:SUNW)
and IBM (NYSE:IBM) exacerbated the valuation concerns.
The company is expected to increase sales despite the weak tech
spending environment, which I think is part of the reason that the
stock traded so well earlier in the year. But at about 10 times
last year's sales, the stock is most expensive. Its forward
earnings multiple is still north of 70 even after the recent 30
percent clip.
Even though there was a fundamentally driven bias in this trade,
mine was purely technical. I suppose the fundamental work helped
to increase conviction, but the reason for initiating the several
positions was because of what I saw on the point and figure chart.
Starting in February, I noticed that BRCD was being leaned on
heavily at double tops as well as its bearish resistance line,
which wasn't broken through Friday's session. The second test of
bearish resistance gave me my first entry point into the stock.
My second entry came through my hand charting of this stock
because it's a component of the Nasdaa-100 (NDX.X), which I hand
chart every night. Through March and April, I began to detect the
formation of a bearish triangle, which was after the stock hit its
current bearish price objective at the time of $22. The trade in
early April up to the $28 level gave me my second entry into a
bearish position, just before the bearish triangle was completed.
Once that pattern was formed, I covered the second position, and
began thinking longer term about the new bearish price objective
of $15 created out of the bearish triangle.
Stepping back, the stock had failed to break its bearish resistance
line on two successive tests, followed by achieving its bearish
price objective of $22, followed by forming a bearish triangle.
At that point, which was in mid-April, I was comfortable with
being short BRCD on any subsequent rally, which is what I've done
up through the most recent relative high at $24. You see, each
time the stock rallies just to below its bearish resistance line,
I have had the good fortune of setting a tight stop that hasn't
been triggered; risk has been too easy to define and manage. The
most recent position was covered last Wednesday on the trade down
to the double bottom to the $19.50 level. I'll be patiently
waiting overhead at $23 for another try.
BRCD - Daily
----------------------------
Merrill Lynch (NYSE:MER)
After the announcement of the settlement, Merrill Lynch (MER)
didn't rally very much. MER is back below where it was before
the settlement was announced. I was wondering if it's a good
buy or if to stay away from the stock. - Regards, Ashok
Thanks for the question, Ashok.
Merrill was tapped with a $100 million fine last week when they
and N.Y. attorney general Elliot Spitzer reached an agreement.
$48 million for New York, and another $52 for all other states.
I think Komansky reached into petty cash to pay for the fine,
and that's all I will say about that.
Ashok made what I think is a very intelligent observation in that
MER below where the announcement of the settlement was made. I
think that reflects the poor conditions of the brokerage
business, both the retail and IB sides.
The seemingly bad news in the form of the $100 million had already
been discounted into the stock, and those amateur shorts who
hadn't already covered did so upon the announcement, leaving the
stock to once again trade off of its business. Separately, there
may be further discounting depending on how the civil cases start
shaping up.
Though I just wrote that the brokerage business is still tough,
I am seeing signs of strengthening. But it's no in the names
such as Merrill Lynch and Goldman Sachs (NYSE:GS). No, the strength
that I'm seeing is in the smaller names like Jeffries (NYSE:JEF),
Legg Mason (NYSE:LM), and Raymond James (NYSE:RJF). Pru, as in
Prudential (NYSE:PRU), is another name that trades very well in
the group, but that one comes with an insurance slant. So for
what it's worth, I'm seeing some bullish things in the brokerage
business, just not in the traditional Wall Street houses.
Back to Merrill. Technically, I don't see much reason to get
bullish on the stock other than the potential for an extended
rebound after the test of the lower end of its descending channel
depicted on the chart below. But then again, I don't know how
smart it is to buy a stock in a downward trend. I'd rather wait
to short it closer to resistance.
MER - Daily
----------------------------
DISCLAIMER:
This column is an information service only. The information
provided herein is not to be construed as an offer to buy or
sell securities of any kind. The Ask the Analyst picks are not
to be considered a recommendation of any stock or option but an
information resource to aid the investor in making an informed
decision regarding trading in options. It is possible at this
or some subsequent date, the editor and staff of The Option
Investor Newsletter may own, buy or sell securities presented.
All investors should consult a qualified professional before
trading in any security. The information provided has been
obtained from sources deemed reliable, but is not guaranteed
as to its accuracy.
*************
COMING EVENTS
*************
==================================================
Market Watch for the week of May 27th
==================================================
------------------------
Major Earnings This Week
------------------------
Symbol Company Date Comment EPS Est
------------------------- MONDAY -------------------------------
None
------------------------- TUESDAY ------------------------------
BMO Bank Of Montreal Tue, May 28 -----N/A----- N/A
DCI Donaldson Tue, May 28 After the Bell 0.45
PLL Pall Tue, May 28 After the Bell 0.20
PFP Premier Farnell Plc Tue, May 28 Before the Bell N/A
TKA TELEKOM AUSTRIA AG Tue, May 28 -----N/A----- N/A
VSL Videsh Sanchar Nigam Tue, May 28 Before the Bell N/A
----------------------- WEDNESDAY -----------------------------
LZB La-Z-Boy Wed, May 29 After the Bell 0.46
OOM MMO2 Wed, May 29 -----N/A----- N/A
TOL Toll Brothers Wed, May 29 -----N/A----- 0.62
------------------------- THURSDAY -----------------------------
CHS Chico`s FAS Thu, May 30 Before the Bell 0.43
COST Costco Wholesale Corp Thu, May 30 -----N/A----- 0.27
DG Dollar General Thu, May 30 After the Bell 0.13
OTE Hellenic Telecomm Thu, May 30 Before the Bell N/A
MIK Michaels Stores Thu, May 30 -----N/A----- 0.20
NGG National Grid Group Thu, May 30 -----N/A----- N/A
------------------------- FRIDAY -------------------------------
PNY Piedmont Natural Gas Fri, May 31 -----N/A----- 1.24
----------------------------------------------
Upcoming Stock Splits In The Next Two Weeks...
----------------------------------------------
Symbol Company Name Ratio Payable Executable
BKNW Bank of the Northwest 5:4 05/24 05/28
SU Suncor Energy 2:1 05/25 05/28
GG Goldcorp 2:1 05/28 05/29
CPG Chelsea Property 2:1 05/28 05/29
UCBI United Community Banks 2:1 05/28 05/29
COCO Corinthian Colleges 2:1 05/28 05/29
RYL Ryland Group 2:1 05/29 05/30
RYAN Ryans Family Steak 3:2 05/29 05/30
DBRN Dress Barn 2:1 05/30 05/31
APWR AstroPower, Inc 3:2 05/30 05/31
RNR RenaissanceRe 3:1 05/30 05/31
HHS Harte-Hanks Inc 3:2 05/30 05/31
CACB Cascade Bancorp 3:2 05/30 05/31
SRCL Stericycle Inc. 2:1 05/31 06/03
FBC Flagstar Bancorp 3:2 05/31 06/03
ALC Alltrista 2:1 05/31 06/03
PRSP Prosperity Bancshares 2:1 05/31 06/03
CNBC Center Bancorp 21:20 06/01 06/03
FDC First Data 2:1 06/03 06/04
SLFI Sterling Financial 5:4 06/03 06/04
AAON AAON Inc 3:2 06/04 06/05
FIC Fair, Isaac and Co 3:2 06/04 06/05
ESI Fair, Isaac and Co 2:1 06/05 06/06
GBTS Gateway Financial Hldngs 11:10 06/05 06/06
UPC Union Planters Corp 3:2 06/06 06/07
CPS ChoicePoint 4:3 06/06 06/07
GGG ChoicePoint 3:2 06/06 06/07
AWR American States Water 2:1 06/07 06/10
FOSL Fossil, Inc. 3:2 06/07 06/10
--------------------------
Economic Reports This Week
--------------------------
With the earnings season essentially over, this week's focus will
be on key economic reports: Tuesday's Consumer Confidence,
Wednesday's Chicago Purchasing Managers Index and Friday's
Productivity/Factory Orders reports. All of these will give us
new insight into the health of the US economy. If consumers are
feeling good and corporations are spending, look for the markets
to applaud--loudly!
==============================================================
-For-
Monday, 05/27/02
----------------
None
Tuesday, 05/28/02
-----------------
Personal Income (BB) Apr Forecast: 0.3% Previous: 0.4%
Personal Spending (BB) Apr Forecast: 0.7% Previous: 0.4%
Existing Home Sales (DM) Apr Forecast: 5.35M Previous: 5.40M
Consumer Confidence (DM) May Forecast: 110.0 Previous: 108.8
Wednesday, 05/29/02
-------------------
None
Thursday, 05/30/02
------------------
Initial Claims (BB) 05/25 Forecast: N/A Previous: 416K
Chicago PMI (DM) May Forecast: 54.5 Previous: 54.7
Help-Wanted Index (DM) Apr Forecast: N/A Previous: 46
Friday, 05/31/02
----------------
Productivity-Rev. (BB) Q1 Forecast: 8.6% Previous: 8.6%
Mich Sentiment-Rev. (DM) May Forecast: 96.0 Previous: 96.0
Factory Orders (DM) Apr Forecast: 0.3% Previous: 0.8%
Definitions:
DM= During the Market
BB= Before the Bell
AB= After the Bell
NA= Not Available
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The Option Investor Newsletter Sunday 05-26-2002
Sunday 2 of 5
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INDEX TRADER GAMEPLANS
**********************
THE SECTOR BEAT - 5/26
by Leigh Stevens
NOTE: I WILL BE OUT OF THE OFFICE UNTIL THURSDAY (5/30).
ON AND AFTER MY RETURN I WILL CONTINUE THE INITIAL ASSESSEMENTS
AND UPDATES FOR THE SECTORS THAT I HAVE NOT WRITTEN ON.
HIGHER ON THE DAY ON Friday -
Not many in green!
DOWN ON THE DAY on Friday -
SECTOR HIGHLIGHT OF THE DAY -
Transportation Average; Dow Jones ($TRAN)
STOCKS: ABF; ALEX; AMR; BNI; CNF; CSX; DAL; FDX; GMT; JBHT; LUV;
NSC; NWAC; R; ROAD; U; UAL; UNP; USFC; YELL
The Dow Transportation Average or Dow Transports ($TRAN) has been
in a sideways basing pattern since early-February, as defined by
the lows that have been consistently falling in the 2650 area, at
and above its 200-day moving average.
The triangle pattern that formed in the early-March to mid-May
timeframe indicated a further consolidation. This in turn was
followed by a bullish breakout above its up trendline (dashed
line). Such a breakout out of this triangle is bullish and
suggests that the average may begin to work higher.
At a minimum TRAN ought to be able to rebound to the high end of
its 2650-3050 trading range. First, the transports would need to
clear its prior upswing high at 2883. Stocks/calls in this group
could be looked at for bullish potential and one of more of them
- and, a "basket" of these stocks offer better diversification -
purchased around current levels.
The more bullish case based on a Point & Figure (P&F) horizontal
count, based on the lengthily period of sideways movement, would
suggest an upside objective to the 3200 area.
NEW SECTOR TRADER FORMAT -
I'M GOING TO LEAVE UP THIS EXPLANATION THIS WEEK - OBVIOUSLY, YOU
CAN SKIP PAST IT IF YOU KNOW ABOUT THE SECTOR TRADER CHANGES
ALREADY.
I will be starting a daily chart/technical review of all the
major popular sectors. Sectors will not be updated every day IF
there is NO significant CHANGE FROM the LAST update. If there is
a chart, with technical patterns and/or indicators that may be of
particular interest, I will include the chart on the sector
index.
Over time, I will be listing the stocks that comprise each
sector, at least by symbol. In addition, if there is a
complimentary iShare or HOLDR that represents the sector, its
symbol and name will be noted also [NOTE: COMING IN NEXT FEW
DAYS], although it will take me some time to pull all this
information together. The advantage of a HOLDR/iShares is that
you have immediate diversification as the shares represent
ownership in a basket of stocks in that sector.
If you enter a trade in only one sector stock or its option,
within the sector, that particular stock may not perform in line
with the Index in question; e.g., there is a broker downgrade on
the stock, but not others in the sector.
Options do, of course, offer the benefit and attraction of
offering a leveraged and limited risk (long options) means to
participate in a sector's trend. However, the ideal means to
play individual stocks is to select at least 3 of the group for
the sector play, using representative stocks in that group.
You'll also note that there are two Indexes that are not sectors
per se - the Amex Composite Index and the Russell 2000. One of
the popular investment "themes" this year, is buying the small
and mid cap stocks. These two indexes are composed of many of
these companies. As such, they are of interest to many traders
and investors.
SECTOR REVIEW - * COMPLETION OF THESE REVIEWS OVER COMING DAYS *
Airline Index ($XAL.X)
STOCKS: ALK; AMR; AWA; CAL; DAL; FRNT; KLM; LUV; NWAC; U; UAL
Still in a downtrend, well under its 50 and 200-day moving
averages. However, XAL has been recently rallying from recent
lows in 79 area, not far from early May bottom at 77.6.
The index wouldn't break out above its major down trendline
before 89. Major support looks like 70 area, but the Airline
group could be bottoming near the prior 5/13 low at 77.6. XAL was
fully oversold based on 14-day RSI on that date, but reading is
up a bit from this extreme. LAST UPDATE: 5/26
Amex Composite Index ($XAX.X)
The small cap stocks so predominating in the Amex, as a group,
had a minor correction from recent highs and from an overbought
oscillator reading. Recent rebound has put XAX back to a
new all intraday and closing high. XAX's up trendline intersects
at 952 currently. Only a close under this level would suggest
that the strong trend was reversing. LAST UPDATE: 5/26
Bank Index ($BKX.X)
STOCKS: BAC; BBT; BK; C; CMA; FBF; FITB; GDW; JPM; KEY; KRB; MEL;
NCC; NTRS; ONE; PNC; SOTR; STI; STT; USB; WB; WFC; WM; ZION
The bank index has made at least a temporary double top in the
916 area - closing penetration of this prior top, and subsequent
support developing in this area, would suggest a new up leg.
If BKK fell under its up trendline at 880 on closing basis, it
would be a bearish signal that the up trend had reversed. If so,
significant support lies in low 860 area. LAST UPDATE: 5/23
Biotechnology Index ($BTK.X)
STOCKS: ABGX; ADRX; AFFX; AMGN; BGEN; CELG; CEPH; CHIR; CRA; DNA;
ENZN; GENZ; GILD; HGSI; ICOS; IDPH; IMCL; IMNX; INCY; MEDI; MLNM;
MYGN; PDLI; TARO; TEVA; VRTX; XOMA
BTK has been in pronounced downtrend, which appears to have
reversed at the early-May lows in the 380 area. A continued rally
from this point suggests that index can work higher as long as we
continue to see a pattern of higher (up) swing highs and higher
(down) swing lows. Emerging up trend is called into question on a
close below the developing up trendline at 399.
Next key technical resistance area is 449-450, the area of
several prior lows and the intersection of daily down trendline.
A close above 449-450 would be a good indication that the trend
has reversed higher. Further resistance then comes in at the top
of the downtrend channel at 475.
Suggested buy of Biotech Holdr's (BBH) at 101.50 on 5/24 open;
recommended initial stop/exit point at 92.5; initial objective:
113; longer-term objective: 127, back to area of mid-March highs.
LAST UPDATE: 5/26
Computer Technology Index ($XCI.X)
STOCKS: to be listed
Remains in a downtrend; May rally recently reversed at 50-day
moving average and from an overbought reading on the daily
oscillators; e.g., 4-day RSI. Key resistance is at 672, then
682. Close over these levels would turn the trend up.
Early-May lows in the 580 area now looks like major support as
current levels are well above this area. LAST UPDATE: 5/23
Computer Boxmaker Index ($BMX.X)
STOCKS: AAPL; CPQ; DELL; GTW; HWP; IBM; SNE; SUNW; UIS; VRTS
Boxmakers sector, an unglamorous term for PC manufacturers, had a
mid-May rally right to its down trendline at it's 50-day moving
average, where BMX reversed - this was also area of its 50-day
moving average.
Current downtrend reverses with a close above 96. Break of near
support at 91, on a closing basis, suggests a possible further
retreat to major support in the 83-85 area. LAST UPDATE: 5/23
Cyclical Index; Morgan Stanley; ($CYC.X)
STOCKS: AA; C; CAT; CSX; DCN; DD; DE; DOW; ETN; F; FDX; GP; GT;
HON; HWP; IP; IR; JCI; KRI; MAS; MMM; MOT; PBI; PD; PPG; PTV; R;
S; UTX; WHR; X
The cyclical index has been locked in a 595-552 trading range
since early- March, with current levels close to the high end of
this range. Interestingly, the recent advance did not hit an
overbought extreme on the daily oscillators, so the sideways
trade could be setting up for an eventual breakout when/if the
economy really gets going.
A breakout above 395 on a closing basis, with subsequent ability
to hold this level on pullbacks, would suggest that another up
leg was developing in CYC. A close below 564, at its up
trendline, would reverse the trend down. LAST UPDATE: 5/23
Defense Index; Amex ($DFI.X)
STOCKS: ATK; BA; COL; DRS; EASI; EDO; ERJ; ESL; FLIR; GD; INVN;
ITT; LLL; LMT; NOC; OSIS; RTN; SSSS; TDY; TTN; UIC
The Defense sector, a very strong performer in the January to May
timeframe, formed a May top after repeated failures to get
through resistance in the 680 area - retreat from the top area
was accompanied by the a downside break of the Jan-May up
trendline. The last rally to this area occurred on less relative
strength, forming a classic price/RSI divergence.
Resistance at the previously broken up trendline is at 673
currently, not far under the major 680 resistance. Am watching
to see if the 50-day moving average acts as support beyond today.
Downside possibilities for a pullback in DFI may lie either in
the 615 or 595 areas, representing the 38% and 50% retracements,
respectively. LAST UPDATE: 5/23
Disk Drive Index ($DDX.X)
Fiber Optics Index ($FOP.X)
Financial Index; NYSE ($NF.X)
Forest & Paper Products Sector Index ($FPP.X)
Gold & Silver Sector Index ($XAU.X)
STOCKS: ABX; AEM; AU; FCX; GOLD; HGMCY; MDG; NEM; PD; PDG; SIL
XAU continues to accelerate to the upside, but may find near
resistance at the top end of its steep uptrend channel at around
90. My longer-term objective is 100 however. Near support looks
like 80, with major support at 70.
If you want to buy into this sector it is high risk, although
gold bullion has a possible per ounce target to $340-345, maybe
350. The question is how much of the potential further price rise
in gold is priced into the XAU stocks already. LAST UPDATE: 5/23
Health Providers Index; Morgan Stanley ($RXH.X)
Healthcare Index; Morgan Stanley ($HMO.X)
Key near support at 594 is at the up trendline, which is close at
hand - recent lows are right on/at this line. If there is no
rebound from its up trendline, there may be some further weakness
that would take HMO down to the 580 area, which represents the
38% retracement level and is a common "minimal" retracement in a
strong uptrend like this one. Sometimes, in a very strong trend,
there will only be a 25% retracement, or a bit less, such as seen
with this index. LAST UPDATE: 5/26
** Suggested basket of 3 HMO stocks -
PacifiCare Health Systems (PHSY) at 23.5-24.7. Stop/exit: 23.3
Wellpoint Health Networks (WLP) - Entry at 72.00, then at 70.
Stop/exit point: 65 Additional buy suggested at 66.
Humana (HUM) - Entry suggested at 15.60 & 15.00-15.15. HOLD only.
Stop/exit point: 13.2
** Other HMO stocks suggested **
Oxford Health Plans (OHP) - Buy stock/calls at 42
Unitedhealth Group Inc. (UNH) - Buy stock/calls at 80.50
Aetna (AET) - Buy at 44.35
High Tech Index; Morgan Stanley ($MSH.X)
Internet Index; CBOE ($INX.X)
Natural Gas Index ($XNG)
Networking Index ($NWX.X)
Oil Index; CBOE ($OIX.X)
Oil Service Sector Index ($OSX.X)
Pharmaceutical Index ($DRG.X)
Retail Index; S&P - CBOE ($RLX.X)
Russell 2000 Index ($RUT.X)
Securities Broker Dealer Index ($XBD.X)
Semiconductor Sector Index ($SOX.X)
Software Index; Goldman Sachs ($GSO.X)
Telecoms Index; No. American ($XTC.X)
Transportation Average; Dow Jones ($TRAN)
STOCKS: ABF; ALEX; AMR; BNI; CNF; CSX; DAL; FDX; GMT; JBHT; LUV;
NSC; NWAC; R; ROAD; U; UAL; UNP; USFC; YELL
** SEE SECTOR HIGHLIGHT OF THE DAY **
Utility Sector Index ($UTY.X)
Wireless Telecom Sector Index ($YLS.X)
NOTE: RISK to REWARD guidelines -
Determining an objective is important, even if it is a moving
target, as this is the reward potential. Determining reward
potential is critical to establishing whether a stop that makes
“sense” (e.g., a sell stop that was placed under a key support
level) would, if triggered, result in a dollar loss that is in
proportion to profit potential; e.g., 1/3 of it. (On occasion,
when the purchase price of call or put is equal to 1/3 or less of
the estimated reward potential, there may not be a specific exit
suggestion, as the cost of the option is equal to the amount that
is being risked.)
Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com
***********************************************************
DAILY RESULTS
***********************************************************
Please view this in COURIER 10 font for alignment
*************************************************
CALLS Mon Tue Wed Thu Week
MMM 127.95 -1.83 -1.26 1.18 0.95 -2.12 Entry point
HET 48.80 -0.52 -0.44 -0.40 1.15 -0.76 Dropped, fail
TEVA 66.80 2.58 0.21 0.66 0.98 4.20 Court win!!!
BAC 76.14 -1.10 -0.81 0.44 1.22 -0.76 Prime pullback
ERTS 63.81 0.20 -2.30 1.60 1.75 0.10 Leading tech
QLGC 47.80 -1.41 -1.69 -0.40 0.30 -4.02 Dropped, stop
AOL 18.97 -0.60 -0.80 -0.03 0.49 -1.01 Needs market
SIMG 9.99 -0.25 0.67 -0.33 0.25 -0.26 Entry point
NOVN 24.37 1.22 0.96 0.20 0.61 3.88 No news rally
RYL 114.10 -0.14 -2.53 0.32 2.94 2.11 Rally bound
SNPS 52.70 -1.26 -0.23 0.25 1.12 0.31 New, wedging
ADBE 37.67 -2.04 -1.81 -0.21 0.17 -3.33 New, rebound?
CI 104.81 -0.56 -2.23 1.25 1.15 0.27 New, primed
PUTS
RE 63.83 -0.33 -0.63 -0.53 1.45 0.13 Dropped, pop
MU 23.36 -0.55 -0.86 -0.05 0.75 -1.65 Dropped, book
TTI 25.50 0.19 -0.44 1.02 -0.42 -0.40 Broke support
HB 60.42 -0.31 -0.84 -0.25 0.82 -0.72 Trending down
GS 78.19 -0.13 -1.04 -1.00 0.97 -2.31 Ready to roll
BRCM 23.52 -1.03 -2.02 0.42 -0.21 -3.78 Sinking more
PLAB 23.96 -0.45 -1.14 -0.21 -0.95 -3.44 Lower lows
COHU 24.00 0.37 -0.92 0.65 -0.49 -1.80 New, break
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********************
THE PLAYS OF THE DAY
********************
Call Play of the Day:
*********************
SNPS - Synopsis, Inc. $52.70 (+0.31 last week)
See details in play list
Put Play of the Day:
********************
COHU - Cohu Inc. $24.00 (-1.80 last week)
See details in play list
**************************
PICKS WE DROPPED THIS WEEK
**************************
Remember that historically, when we drop a pick it will go up
10 to 15% the very next week. It is part of Murphy's Law.
Just because we drop a stock as a pick does not mean we are
advocating a "sell" on any position you have. We are simply
dropping our recommendation as a new play. Existing plays
can and do continue on and are usually profitable.
CALLS
^^^^^
HET $48.80 (-0.76) The broader market is holding back HET's
rally attempt, and that has us worried. The stock couldn't
get above the $50 short term resistance level during its
most recent try, which may indicate that another rollover is
around the corner. We'll look to exit plays next week on
any bounce ahead of a potential relatively lower high.
QLGC $47.80 (-4.02) Despite the bullish picture painted on the
PnF chart, QLGC just couldn't get any bullish action going last
week. While this looks like just normal consolidation, we are
sticking with our discipline and dropping the play tonight,
given the close below our $48 stop on Friday. The stock could
rebound on Tuesday or continue falling to fill in the gap from
early May, but that's what stops are for is to protect us from
just hanging on to a position, hoping that it will come back.
According to the PnF chart, QLGC should still make a strong
bullish candidate. If you're going to play it, wait for price
to stabilize and get back over $48. As for us, we're going to
devote our attention to healthier plays.
PUTS
^^^^
RE $63.83 (+0.13) RE spiked higher on no news last Friday.
The move higher was a short covering burst of buying, which
put RE above its 10-dma for the first time in about three
weeks. The move could signal a reversal, so we're looking
to cut losses next week upon a filling of the gap higher from
Friday morning.
MU $23.36 (-1.65) We've gotten a nice little slide out of MU over
the past couple weeks, but we're concerned that the tide is about
to change. Even with the SOX dipping below the $500 level on
Friday and posting a more than 3% decline, MU failed to dip below
support defined by its lows over the past 3 days near $23. Add
in the fact that the SOX looks like it is due for a bounce, and
we'll take this opportunity to close out our MU play with a gain.
***********
DEFINITIONS
***********
SL = Suggested stop loss. Sell if bid breaks this price.
OI = Open Interest - the number of open contracts outstanding.
ITM = In the money
ATM = At the money
OTM = Out of the money
ADV = Average Daily Volume
The options with a "*" by the strike price are our choices from the
group. If the stock moves as expected we feel they have the best
chance to substantially increase or double in price with the best
risk/reward ratio compared to the other options for the same stock.
You must determine if they fit your risk profile for time and price.
Analysts ratings: 1-2-3-4-5
Analysts who follow each stock rate it and these rating are
accumulated and displayed as follows;
Position 1 = number of analysts recommending "strong buy"
Position 2 = number of analysts recommending "moderate buy"
Position 3 = number of analysts recommending "hold" or "neutral"
Position 4 = number of analysts recommending "moderate sell"
Position 5 = number of analysts recommending "strong sell"
Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys",
1 "hold" recommendation.
RISKS of SELLING PUTS:
The risk of selling naked puts is always the possibility
of a catastrophic event that drops the stock below the
strike price and could result in the stock being PUT to you.
Always protect yourself with a "buy to cover" limit order
to take you out before this can happen.
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**************************************************************
**********
DISCLAIMER
**********
Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
**************************************************************
ADVERTISING INFORMATION
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or any Premier Investor Network newsletter please contact:
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The Option Investor Newsletter Sunday 05-26-2002
Sunday 3 of 5
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**************
NEW CALL PLAYS
**************
CI - CIGNA Corp. $104.81 (+0.27 last week)
CIGNA Corporation and its subsidiaries are an investor-owned
employee benefits organizations in the United States. Its
subsidiaries are major providers of employee benefits offered
through the workplace, including health care products and
services, group life, accident and disability insurance,
retirement products and services and investment management.
CIGNA's operating divisions include Employee Health Care, Life
and Disability Benefits, CIGNA Group Insurance, Employee
Retirement Benefits and Investment Services, and International
Life, Health and Employee Benefits.
While the broader health care sector continues to languish,
such as pharmaceuticals and biotechnology, other pockets of the
sector are doing extremely well. The HMO stocks are among the
best performing group of stocks in the health care group. The
demographic trends in the U.S. are playing into the strength of
the group, as well as the distaste left by the struggles in the
drugs and biotechs. One stock in the group that is cheap at
current levels is CI. It trades for only about 13 times this
year's earnings, which is well below the company's historical
valuation. Part of the reason for the discount at which the
stock trades is due to the subpoena issued by the Justice
Department for records into marketing practices. The news of
the subpoena caused a drop in the stock, but investors are
beginning to shake off those fears as the stock is trending
towards a breakout. The stock is forming an ascending wedge
with a top in place just above Friday's close at the $105 level.
The strengthening pattern of relatively higher lows should lead
to a breakout in the coming days. Watch for the move above the
overhead congestion by a breakout above the $106 level on heavy
intraday volume. Those who prefer to enter near support can
watch for a pullback early in next week's trading near the $103
level on lighter intraday volume. Our stop is initially in
place at the $101 level.
BUY CALL JUN-100 CI-FT OI= 41 at $6.50 SL=4.00
BUY CALL JUN-105*CI-FA OI=156 at $3.30 SL=1.75
BUY CALL JUN-110 CI-FB OI=398 at $1.30 SL=0.75
BUY CALL JUL-105 CI-GA OI=404 at $4.50 SL=2.25
Average Daily Volume = 834 K
ADBE – Adobe Systems $37.67 (-3.43 last week)
A long-time leader in desktop publishing software, ADBE
provides graphic design, publishing, and imaging software
for Web and print production. Offering a line of application
software products for creating, distributing, and managing
information of all types, the company generates nearly 75% of
sales through publishing software products such as Photoshop,
Illustrator, and PageMaker. Its Acrobat Reader, which uses
portable document format (PDF) is popping up all over the
Internet, as businesses shift from print to digital
communications. In addition, ADBE licenses its industry
standard technologies to major hardware manufacturers,
software developers, and service providers, as well as
offering integrated software solutions to businesses of all
sizes.
Have you noticed the incredible weakness in the Software sector
(GSO.X) in recent weeks? The index is still trading amazingly
close to its September lows and showing very little participation
in the brief rally attempts in the Technology sector. In the
face of this depressing weakness, ADBE is a shining beacon of
hope. The stock has been holding up remarkably well in light of
the sector weakness and is consistently finding support near the
$36 level on pullbacks. In contrast to many stocks in the
Software sector, ADBE is above its 200-dma ($34.42) and has
remained so for the past 3 months. The breakout over the $41
level a couple weeks ago indicates that the stock wants to work
higher and it is notable that even with the broad market weakness
on Friday, the stock managed to post a 1.5% gain. While there is
no doubt that we're gaming a bullish play in a weak sector, we're
looking for a rebound in the GSO to help ADBE to once again push
to fresh post-9/11 highs. Given the weakness of the GSO, this
is a higher risk play, but we're looking to mitigate that risk
with a tight stop, just below the recent lows. Intraday dips
near the $36 level will provide the best entries at this time,
with stops initially placed at the $35 level. As an added bonus,
we could see the stock see some buying interest ahead of the
company's earnings report, due out on June 13th.
BUY CALL JUN-35 AEQ-FG OI=2178 at $4.20 SL=2.50
BUY CALL JUN-40*AEQ-FH OI=3854 at $1.35 SL=0.75
BUY CALL JUL-35 AEQ-GJ OI=1475 at $4.80 SL=3.00
BUY CALL JUL-40 AEQ-GK OI=4099 at $2.20 SL=1.00
BUY CALL JUL-45 AEQ-GL OI=3327 at $0.85 SL=0.25
Average Daily Volume = 3.71 mln
SNPS - Synopsis, Inc. $52.70 (+0.31 last week)
Synopsis is a supplier of electronic design automation software
to the global electronics industry. The company's products are
used by designers of integrated circuits (ICs), including
system-on-a-chip ICs, and the electronic products (such as
computers, cell phones, and internet routers) that use such ICs
to automate significant portions of their chip design process.
SNPS' products offer its customers the opportunity to design ICs
that are optimized for speed, area, power consumption and
production cost, while reducing overall design time.
Two of the weakest sectors of the market lately have been
Software and Semiconductors, so it may come as a surprise that
we're looking bullish on a stock that is tied to both areas of
Technology. But when you find a compelling trend in place,
sometimes it pays to take a risk. As a Software company that
services the Semiconductor market, SNPS normally responds well
to bullish trends in these areas of the market. The fact that
SNPS has been trading well over the past 3 weeks while both the
Software (GSO.X) and Semiconductor (SOX.X) sectors have been weak
is an encouraging sign. Although SNPS had been caught in a trend
of lower highs and lower lows since the first of the year, that
trend appears to have been decisively broken last week. The stock
moved right up to the descending trendline ($53) just over a week
ago and fell back, only to rally strongly over the past 3 days,
closing over that trendline for the first time in 5 months on
Friday. Only time will tell if this breakout is real and there is
some formidable resistance to deal with between $54-55. But if
the SOX and GSO can get some positive momentum going, that should
propel the stock through near-term resistance and give the bulls a
shot at challenging the longer-term descending trendline at
$57.50. Adding another bullish catalyst to the mix, SNPS is set
to announce earnings on June 4th, so we might just get some
bullish action heading into the report. Use bounces from intraday
support at $51-52 or even as low as $50 to initiate new positions
ahead of the next run at the $55 resistance level. We are
initiating coverage with a rather wide stop at $49.50.
BUY CALL JUN-50 YPQ-FJ OI=1524 at $4.30 SL=2.75
BUY CALL JUN-55*YPQ-FK OI= 892 at $1.50 SL=0.75
BUY CALL JUL-55 YPQ-GK OI= 6 at $2.65 SL=1.25
BUY CALL JUL-60 YPQ-GL OI= 508 at $1.05 SL=0.50
Average Daily Volume = 1.27 mln
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“7 Steps to Success – Trading Options Online”.
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and clicking on the link to the book on its home page.
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******************
CURRENT CALL PLAYS
******************
BAC – Bank of America Corp. $76.14 (-0.76 last week)
Providing a diversified range of banking and certain
non-banking financial products and services, BAC's operations
consist of Consumer Banking, Commercial Banking, Global
Corporate and Investment Banking, and Principal Investing and
Asset Management. Consumer Banking targets individuals and
small businesses, while Commercial Banking targets businesses
with annual revenues up to $500 million. Global Corporate
and Investment Banking provides investment banking, trade
finance, treasury management, leasing and financial advisory
services. Principal Investing includes direct equity
investments in businesses and general partnership funds, while
the Asset Management businesses are split into three branches;
Private Bank, Banc of America Capital Management and Banc of
America Investment Services.
The bullish close on Thursday had shares of BAC moving north
again on Friday morning, but the acute lack of buying brought
the initial upward surge to an abrupt end before the end of the
first hour. Investors didn't want to go into the weekend long
and that sentiment had the stock in a long slow downward drift
for the majority of the day, with the stock ending at its low.
BAC is still in its ascending trend after finding support at
the trendline near $75 on Wednesday. With daily Stochastics now
pushing north in bullish fashion and the tendency of the week
after Memorial Day to be bullish, we're looking for BAC to
challenge its all-time highs of last week in rather short order.
The ascending trendline has now inches up to the $75.75 level,
which just happened to provide some intraday support last week.
Consider new positions on a dip and bounce in this area.
Otherwise, wait for the bulls to prove their intentions by
pushing BAC through its all-time highs near $77 (actually wait
for a move through $77.25) before playing. Look for renewed
buying in the Banking index (BKX.X) to help fuel the bulls in
BAC. Our stop remains at $74.50.
BUY CALL JUN-75*BAC-FO OI=11441 at $2.25 SL=1.00
BUY CALL JUN-80 BAC-FP OI= 4947 at $0.35 SL=0.00
BUY CALL JUL-75 BAC-GO OI= 330 at $3.10 SL=1.50
BUY CALL JUL-80 BAC-GP OI= 1229 at $0.95 SL=0.50
BUY CALL AUG-80 BAC-HP OI= 6923 at $1.50 SL=0.75
Average Daily Volume = 5.77 mln
ERTS – Electronic Arts $63.81 (+0.10 last week)
ERTS creates, markets and distributes interactive entertainment
software for a variety of hardware platforms, including Sony's
PlayStation 2, the PC, Nintendo GameCube and the recently
launched Xbox. The company's EA.com business segment is engaged
in the creation, marketing and distribution of entertainment
software which can be played or sold online, as well as the
ongoing management of subscriptions of online games and Website
advertising.
Conditions appear to be improving for makers of video game
software for Microsoft's Xbox and Sony's Playstation 2.
Microsoft and Sony have recently announced cuts in price for the
game units and this is likely to translate into increased selling
volumes for the makers of the software games. Investors seem to
be grasping that concept from the look of ERTS' price chart as
the stock managed a breakout over the $64 resistance level on
Thursday. Unfortunately, there wasn't enough buying interest
ahead of the long Holiday weekend to sustain the stock's momentum
and it suffered a bit of weakness on Friday. That weakness looks
like it is just setting us up for another entry point before the
bulls really get serious and take aim on the stock's all-time
highs near $67. Along with the positive trend in price over the
past 2 weeks in ERTS, the Software sector (GSO.X) appears to be
trying to put in a bottom near the $124 support level. Note that
a print of $65 will generate a new double-top breakout on the PnF
chart and that should clear the way for a run towards the $67
level. The current PnF bullish price objective is $79, so once
clear of resistance the stock could really get moving. Use the
current weakness in ERTS to initiate new positions on a rebound
from support in the $62-63 area or else wait for the confirmation
of a volume-backed rebound through the $65 level before playing.
Our stop remains in place at $61, just below last Tuesday's
intraday lows.
BUY CALL JUN-60 EZQ-FL OI=2328 at $5.30 SL=3.25
BUY CALL JUN-65*EZQ-FM OI=3534 at $2.20 SL=1.25
BUY CALL JUL-65 EZQ-GM OI= 497 at $3.60 SL=1.75
BUY CALL JUL-70 EZQ-GN OI= 305 at $1.75 SL=1.00
Average Daily Volume = 2.92 mln
MMM – Minnesota Mining and Manufacturing $127.95 (-2.12 last week)
Commonly known as the maker of the ubiquitous, adhesive-backed
Post-It Notes, MMM is also a leading manufacturer of a variety
of industrial, consumer, and medical products. Reflective
sheeting on highway signs, respirators, spill-control sorbents,
and Thinsulate brand insulations are just some of the company's
industrial products. MMM also makes microbiology products,
making it easier for food processors to test for the
microbiological quality of food.
After dipping back to support early in the week, the DOW spent
the majority of the week marking time, waiting for the next
catalyst to arrive that can push it through near-term resistance
near 10,350. As the week drew to a close, the index settled in
right around the 10,100 support level, with buyers unwilling to
step into new positions ahead of the long Holiday weekend. This
dynamic is largely responsible for the lackluster trade in shares
of MMM throughout the week. While the stock came right down to
strong support in the area of $126 early in the week, the rebound
has been rather tepid, reflecting investor nervousness. But the
breakout above the $127 level is still intact, with the 6-week
ascending trendline now rising to the $127 level. With the week
after Memorial Day being historically bullish, we're looking for
MMM to lead the DOW up to and through resistance in the week
ahead. MMM continues to be one of the best performing DOW stocks
and until the ascending trend is broken, dips continue to provide
attractive entry points. Recall that the vertical count from the
PnF chart is pointing to a bullish price objective of $140, and
once the stock is clear of near term resistance it could really
get moving. We're currently looking for dips to the $127 level
to provide the best entry points. Traders that want to see the
stock breakout first will need to wait for MMM to top the $130.75
level (just above the recent intraday high of $130.60) before
taking a position. Stops remain at $126.
BUY CALL JUN-125 MMM-FE OI=1312 at $5.20 SL=3.25
BUY CALL JUN-130*MMM-FF OI=2874 at $2.05 SL=1.00
BUY CALL JUL-130 MMM-GF OI=1430 at $3.70 SL=1.75
BUY CALL JUL-135 MMM-GG OI=1576 at $1.75 SL=1.00
Average Daily Volume = 1.88 mln
RYL – The Ryland Group $114.10 (+2.11 last week)
The Ryland Group is a homebuilder and mortgage-finance company
that has built more than 175,000 homes. Additionally, the
Ryland Mortgage Company (RMC) has provided mortgage financing
and related services for more than 155,000 homebuyers.
Currently, Ryland homes are available in more than 260
communities in 21 markets across the United States.
Homebuilding stocks got a shot in the arm on Friday morning
with the better than expected New Home Sales report which once
again managed a strong showing. Rather than the expected 885K
new sales for the month of April, the actual report showed 915K,
3.4% ahead of expectations. That sent the buyers scrambling in
the Home Builder stocks and despite broad-based weakness
throughout the broad markets, the Dow Jones Home Builders index
($DJUSHB) managed another solid performance, up 1.6%. Shares
of RYL performed rather well throughout the day, although after
the initial push higher, the stock essentially meandered
sideways, given the lack of buying interest in anything ahead of
the long weekend. the DJUSHB and RYL will likely need to see
some renewed strength in the broad market if the bullish action
is going to continue, but with the daily Stochastics now solidly
bullish, we like the stock's prospects over the week ahead.
Intraday pullbacks to the $112 or even $110 level can be used
for initiating new positions ahead of the next breakout move.
That's right, RYL is just a short-distance away from pushing
through the $116 resistance level and testing its all time highs
just below $118. Momentum traders will want to see a print at
$118 (creating a triple-top Buy signal on the PnF chart) along
with the $DJUSHB once again moving through the $388 resistance
level before initiating new plays. Raise stops to $108.25 this
weekend.
BUY CALL JUN-110 RYL-FB OI= 338 at $7.50 SL=5.25
BUY CALL JUN-115*RYL-FC OI= 933 at $4.60 SL=2.75
BUY CALL JUN-120 RYL-FD OI= 281 at $2.40 SL=1.25
BUY CALL JUL-115 RYL-GC OI=1142 at $7.80 SL=5.50
BUY CALL JUL-120 RYL-GD OI= 38 at $5.70 SL=3.75
Average Daily Volume = 665 K
TEVA - Teva Pharmaceuticals $66.80 (+4.20 last week)
Teva Pharmaceutical Industries Ltd. is a fully integrated global
pharmaceutical company producing drugs in all major therapeutic
categories. In the area of proprietary drugs, Teva has focused
on products for central nervous system disorders, primarily the
development of Teva's first globally marketed branded drug,
Copaxone, a treatment for relapsing-remitting multiple sclerosis.
Teva also possesses significant manufacturing operations for
active pharmaceutical ingredients (API). Teva Pharmaceuticals USA,
Inc., Teva's principal United States subsidiary, is a generic
drug company in the United States.
Late Thursday night, a U.S. judge invalidated the patents of
Glaxo Smith Kline's (NYSE:GSK) antibiotic Augmentin, which opened
the doors for generic competition. The company responded by
saying that its three patents expire next month, July, and in
December, and that it will appeal the ruling by the judge. The
ruling was a major victory for the generic drug makers as the
global annual sales of the drug reached $2 billion. TEVA is one
of the generic drug makers that stands to reap huge rewards from
the ruling. In response to the win in the courts, AG Edwards
upgraded shares of TEVA from a hold rating to a buy investment
rating. The news caused a gap higher opening in the stock last
Friday at the $67.81 level, then the stock raced past the $68
level in early morning trade. Certainly the trade higher this
morning after the news was out of the bag could have offered
traders riding the recent trend higher a good chance to book
profits on partial gains, if not full positions. The stock's
reversal into the close of trading signals that the move
higher this week was of the buy on the rumor, sell on the news
variety. With the news out, some consolidation may be in
order. But thereafter, we'll look for a rebound and resumption
of the trend higher. Watch for a pullback then a bounce from
the $65 to $66 support area early next week. Confirm lighter
volume on the way back down as profit taking, then watch for
an intraday bounce from support for a new entry.
BUY CALL JUN-65*TVQ-FM OI=1619 at $3.10 SL=1.75
BUY CALL JUN-70 TVQ-FN OI= 500 at $0.80 SL=0.25
BUY CALL JUL-65 TVQ-GM OI= 115 at $4.00 SL=2.00
BUY CALL JUL-70 TVQ-GN OI= 622 at $1.55 SL=0.75
Average Daily Volume = 910 K
AOL - AOL Time Warner $18.97 (-1.01 last week)
AOL Time Warner Inc. is a fully integrated, Internet-powered media
and communications company. The Company was formed in connection
with the merger of America Online, Inc. (America Online) and Time
Warner Inc. (Time Warner), which was consummated on January 11,
2001. America Online and Time Warner are wholly owned subsidiaries
of AOL Time Warner.
AOL announced a minor reshuffling of management last Friday,
headed by the new chief Richard Parsons. The company said that it
was placing the lobbying and technology policies under the direct
control of the new chief executive officer, and that the company's
global chief technology officer will begin reporting directly to
Parsons. The news didn't spark a short term rally in the stock,
but it did signal that the new leader of the company is taking
strides to get the stock back on track. Over the short term,
though, the direction of the broader market will determine the
path of AOL. Fortunately next week is historically bullish, and
AOL is a perfect stock for playing such a historical trend. The
stock is a big institutional favorite and tends to track the
major averages very closely. So a good week for the market next
week should translate into a good week for AOL. Technically the
stock has been attracting buyers at the 10-dma, which now sits
just below market at the $18.82 level. The stock bounced around
that level last Friday, but managed to close above it for the
third consecutive day, revealing that the buyers are lower and
willing to support the stock during pullbacks. With strength in
the broader market next week, those buyers should gain
conviction. If so, look for a high volume breakout above the
$20 level in an advancing broader market.
BUY CALL JUN-17*AOL-FW OI=15172 at $1.95 SL=1.00
BUY CALL JUN-20 AOL-FD OI=49905 at $0.55 SL=0.25
BUY CALL JUL-17 AOL-GW OI= 4849 at $2.35 SL=1.00
BUY CALL JUL-20 AOL-GD OI=12898 at $0.95 SL=0.50
Average Daily Volume = 24.1 mln
SIMG - Silicon Image $9.99 (-0.26 last week)
Silicon Image, Inc. designs, develops and markets semiconductors,
including transmitters, receivers, controllers and video
processors, for applications that require high-bandwidth, cost-
effective solutions for high-speed data communications. The
Company's primary focus has been on the local interconnect between
host systems, such as PCs, set-top boxes and DVD players, and
digital displays, such as flat-panel displays, CRTs and
televisions.
SIMG fell back during Friday's session on the weakness in the
broader technology segment of the market. Of course the downgrade
of the semiconductor equipment sector by Goldman Sachs certainly
didn't help the cause of SIMG, and those of us leaning bullish on
this play. Although the stock out paced the broader technology
measures and the Philadelphia Semiconductor Index (SOX.X) to the
downside, its slide came on relatively lighter volume which may
have hinted that the selling pressure wasn't all that serious,
and it may have in fact created a more favorable entry point
going into next week's trading. The stock fell back to the
lower end of its ascending channel visible on the daily chart.
With the stock back near support, traders can look to take
positions on an intraday bounce or a reversal in the broader
market, followed by setting a tight stop just below entry. One
place to look for a bounce from is the 10-dma at $10, which the
stock just fractionally closed below last Friday. From that
entry point, we'll look ahead for a breakout above the $11
level on a return of volume.
BUY CALL JUN-7 QSI-FU OI=60 at $2.85 SL=2.00
BUY CALL JUN-10*QSI-FB OI=60 at $1.25 SL=0.75
BUY CALL JUL-10 QSI-GB OI=11 at $1.50 SL=0.75
BUY CALL JUL-12 QSI-GV OI=70 at $0.60 SL=0.25
Average Daily Volume = 702 K
NOVN - Noven Pharmaceuticals $24.37 (+3.88 last week)
Noven Pharmaceuticals, Inc. is engaged in the development and
manufacture of advanced transdermal drug delivery products and
technologies and prescription transdermal products. Noven's
principal commercialized products are transdermal drug delivery
systems for use in hormone replacement therapy. The Company's
first product was an estrogen patch for the treatment of
menopausal symptoms marketed under the brand name Vivelle in the
United States and Canada and under the brand name Menorest in
Europe and other markets.
Holy cow! NOVN exploded to the upside in today's session on
no news. There was talk of an upgrade earlier in the day, but
that news was never confirmed. Whatever the reason, the bulls
got the upper hand in NOVN and decided to run with it while they
had the ball. The stock reached as high as $26.80 earlier in
the session before pulling back into the close of trading. More
than twice the daily volume exchanged hands in the stock in a day
in which the volume on the exchanges were at yearly lows. The
intense buying pressure accelerated once the stock cleared the
$24 level that we had been pointing out for the last few days.
Hopefully the quick breakout above $24 offered traders a quick
scalp day trade to above the $26 level. The stock did pullback
though, which may bring about another entry opportunity into this
super strong play next week. Let's look for the previous
resistance at the $24 level to now act as support. Intraday
pullbacks to that level on relatively lighter volume can be used
to gain new bullish entries into this play, provided that the
broader market is strengthening. Ideally, we'll see confirmation
in the biotechnology sector as well. Entries taken near the $24
area can target the intraday high near $26.80 for near term upside
as a revisit of that level over the coming days is likely.
BUY CALL JUN-22*NPQ-FX OI= 86 at $2.80 SL=1.75
BUY CALL JUN-25 NPQ-FD OI= 35 at $1.20 SL=0.50
BUY CALL JUL-22 NPQ-GX OI= 66 at $3.20 SL=2.00
BUY CALL JUL-25 NPQ-GE OI=207 at $1.65 SL=0.75
Average Daily Volume = 206 K
*************
NEW PUT PLAYS
*************
COHU - Cohu Inc. $24.00 (-1.80 last week)
Cohu, Inc. is the owner and operator of businesses in the
semiconductor equipment segment, and the television camera segment.
The Company's wholly owned subsidiary Delta Design, Inc., designs,
manufactures and sells semiconductor test handling equipment to
semiconductor manufacturers and semiconductor test subcontractors
throughout the world. The Company's Electronics Division designs,
manufactures and sells closed circuit television cameras and
systems to original equipment manufacturers, contractors and
government agencies.
The previously much loved semiconductor sector has taken a turn
for the worst in recent weeks. Goldman Sachs downgrade of the
capital equipment group exacerbated that trend late last week.
The brokerage firm lowered its rating on the entire chip equipment
group due to the valuation of the stocks following their recent
run, and fundamental issues later this year. Other brokerage
firms tried to come to the defense of the sector, but it was
not enough in a weak broader market environment, which brings us
to one of the weakest stocks in the group in COHU. The relatively
small chip equipment stock is heading for a major breakdown after
last Friday's downgrade of its sector, and it could start as early
as next week. Technically, the stock has support at the $24
level where it stopped is decline late last Friday after being
sold heavily throughout the entire session. Below the short
term support at $24, the stock doesn't have any help until the
$20 level below, which was last traded at in January. Traders
looking to enter new positions into weakness below current levels
should wait for a decline below the $23 mark in conjunction with
confirming further weakness in the SOX. From there, we'll
confirm the breakdown attempt with a trade down through the $22
level. Rollover traders can look for a bounce followed by
weakness near the overhead 10-dma up at the $26 level. The
stock had trouble at that level early last week, so we expect
that the sellers would return upon a rally back up to that
level. Our stop is initially in place at the $26.25 level, just
above that 10-dma.
BUY PUT JUN-25*QCH-RE OI=45 at $1.80 SL=1.00
BUY PUT JUL-25 QCH-SE OI= 0 at $2.60 SL=1.75
Average Daily Volume = 160 K
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The Option Investor Newsletter Sunday 05-26-2002
Sunday 4 of 5
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CURRENT PUT PLAYS
*****************
TTI - Tetra Technologies $25.50 (-0.40 last week)
TETRA Technologies, Inc. is an oil and gas services company with
an integrated calcium chloride and brominated products
manufacturing operation that supplies feedstocks to energy
markets, as well as other markets. The Company is comprised of
three divisions. The Fluids Division manufactures and markets
clear brine fluids dry calcium chloride. The Testing & Services
Division provides production testing services and technology and
services required for the separation and recycling of oily
residuals generated from petroleum refining and exploration and
production operations.
The oil service sector put in another very volatile week last
week as tensions in the Middle East continued to influence
traders and investors. Then an uprising between Pakistan and
India further fueled the fears of an unstable political
environment, which could ultimately lead to a disruption of
supply in crude oil from the Middle East. The Oil Service
Sector Index ($OSX.X) pulled back ahead of the three day
weekend during last Friday's session, which saw the sector fall
by about 1.5 percent. For its part, TTI tried to rally when
its sector attempted to, but was unable to put in any higher
highs, and finally broke down below the three day support level
at $25.70 during Friday's pullback in the sector. The stock
traded down on decreased volume, but nevertheless broke the
level that we had been monitoring for support. That should
pave the way for further downside going into next week's
trading especially if the OSX.X continues to pullback as TTI
is one of the weaker stocks in the broader sector, although it
is not a component of the OSX.X itself. For entry points,
we can start to look for rollovers from the descending 10-dma
now overhead at the $26.46 level, or lower at the previous
support at the $25.70 level if the bears try to defend that
level. Upon further downside, entries can be taken on a break
below last Friday's low at the $25.20 level, then confirmed
with a decline below the $24.90 level. We'd like to see some
more volume come into the stock on further downside from here
to confirm the selling has conviction.
BUY PUT JUN-25*TTI-RE OI=137 at $1.25 SL=0.75
BUY PUT JUL-25 TTI-SE OI= 2 at $1.70 SL=0.75
Average Daily Volume = 151 K
HB - Hillenbrand $60.42 (-0.72 last week)
Hillenbrand Industries, Inc. is a diversified holding company that
owns 100% of the capital stock of its three major operating
companies serving the funeral services and healthcare industries.
The Company's Health Care Group consists of Hill-Rom Company, a
manufacturer of equipment for the health care market and provider
of wound care and pulmonary/trauma management services.
The whipsaws in the broader health care group didn't phase HB
very much during last week's volatile trading. The stock
slid lower earlier in the week on renewed skepticism of the
strength of the healthcare industry in light of the weakness in
the broader domestic economy. But it did put on a short lived
rally during Thursday's trading, which may have been partially
due to the ramp in the biotechnology sector, but also the
oversold condition of the stock. The rally higher last Thursday
was most likely a short covering situation in which the bears
decided it was time to take profits. But then in Friday's
session we saw the stock rollover before even attempting to test
its bearish 10-dma which closed last Friday at the $61.03 level.
The failure to trade up to the 10-dma may portend further
weakness in the stock as the buyers show little to no conviction
to carry the stock higher. We'll be looking for a breakdown
below the recent relative lows in next week's trading to confirm
that the trend remains in place. Specifically, we'll look for
the $59.50 level to give way to further selling on more weakness
in the broader markets. From there we'll again look to target
the relative low to the downside near the $58.30 low. Otherwise
continue to watch for rollovers from just below the 10-dma or
at the 10-dma if it's ever reached to the upside.
BUY PUT JUN-60*HB-RL OI=4 at $1.80 SL=0.75
BUY PUT JUL-60 HB-SL OI=2 at $2.35 SL=1.25
Average Daily Volume = 146 K
PLAB - Photronics $23.96 (-3.44 last week)
Photronics, Inc. and its subsidiaries manufacture photomasks,
which are high precision photographic quartz plates containing
microscopic images of electronic circuits. Photomasks are a key
element in the manufacture of semiconductors, and are used as
masters to transfer circuit patterns onto semiconductor wafers
during the fabrication of integrated circuits and, to a lesser
extent, other types of electrical components. The Company
operates principally from 11 facilities, five of which are
located in the United States, three in Europe and one each in
Korea, Singapore and Taiwan.
Goldman Sachs analyst James Covello downgraded the semiconductor
capital equipment group Friday morning based upon his belief
that the second half of the year could see a slack in demand
and a pause in orders for new equipment. Covello didn't
attack any companies specifically, but rather the entire
semiconductor equipment sector, which sent the bellwethers of
the group sliding lower such as Applied Materials (NASDAQ:AMAT),
Novellus (NASDAQ:NVLS), and KLA Tencor (NASDAQ:KLAC). The
weakness in the chip equipment stocks contributed to the slide
in the Philadelphia Semiconductor Sector Index (SOX.X), which
finished lower by 3 percent for the day. Although PLAB is a
smaller, lesser known player in the global semiconductor
industry, the downgrade didn't escape its shares as the stock
headed lower for the seventh consecutive session, reaching
the $22.95 level before staging an intraday relief rally.
Volume remained relatively active again on the way down, but
died off as the stock fell under short covering buying pressure
into the close of trading. For the day, volume failed to total
the 1 million share mark, making Friday's session one of the
lightest days of trading activity over the last several weeks.
From here, the stock's direction will depend on the sentiment
in the semiconductor sector. Further weakness in the SOX.X
should lead to lower lows in this stock. Watch for that pull
of the SOX.X next week, then look for PLAB to breakdown below
its intraday low near the $23 level, or watch for the rollover
following more short covering from the $26 level.
BUY PUT JUN-25*PQF-RE OI=1440 at $2.20 SL=1.00
BUY PUT JUL-25 PQF-SE OI= 350 at $3.10 SL=1.75
Average Daily Volume = 699 K
BRCM – Broadcom Corporation $23.52 (-3.78 last week)
Sitting in the sweet spot between the Broadband and
Semiconductor sectors, BRCM is a provider of highly integrated
silicon solutions that enable broadband digital transmission
of voice, video and data to and throughout the home and within
the business enterprise. These integrated circuits permit the
cost-effective delivery of high-speed, high-bandwidth networking
using existing communications infrastructures that were not
originally designed for the transmission of broadband digital
content. Using proprietary technologies, the company designs,
develops and supplies integrated circuits for several markets
including digital cable set top boxes, cable modems, high-speed
office networks, home networking, and digital subscriber lines.
Impatient traders are wondering when BRCM is going to get it over
with and finally break down under support. Technically, the
breakdown has already happened with the recent lows near $24
giving way and the stock closing below that level on Friday for
the first time since October 3rd. Clearly the bulls are
attempting to defend the stock in the vicinity of that strong
support and if the SOX can rebound next week from the $500 level,
they just might be successful. But we can't seem to shake the
notion that BRCM shareholders are in for some pain before the
next rebound in the stock, with the bearish picture that has been
painted on the PnF chart. That breakdown under $24 produced
another triple-bottom breakdown with a bearish price objective of
$18 (very near the September lows) and given the stock's long
descending trend (since January) we think the bears are going to
win this battle. We want to initiate new positions on failed
intraday rallies to give a better balance of risk and reward,
especially given the stock's refusal to go into free-fall when
puncturing support levels. Target new entries near the $25 level
or even as high as $26.50. We're ratcheting our stop down to $27
this weekend. Should the SOX really catch fire next week (hey, it
could happen, even with all the downgrades last week), we'll want
to closely monitory BRCM. If it starts participating in the
rally, then we'll want to stand aside from initiating new
positions and very likely close the play until the bulls have
exhausted themselves again.
BUY PUT JUN-25 RCQ-RE OI=6572 at $2.90 SL=1.50
BUY PUT JUN-22*RCQ-RX OI=2772 at $1.70 SL=0.75
BUY PUT JUN-20 RCQ-RD OI=4187 at $0.90 SL=0.50
Average Daily Volume = 13.2 mln
GS – Goldman Sachs Group $78.19 (-2.31 last week)
The Goldman Sachs Group is a global investment banking and
securities firm that provides a wide range of services worldwide
to a substantial and diversified client base that includes
corporations, financial institutions, governments and high
net-worth individuals. The company provides investment banking,
which includes financial advisory and underwriting, and trading
and principal investments, which includes fixed income, currency
and commodities, equities and principal investments. GS
recently completed the acquisition of Spear, Leeds & Kellog,
which is engaged in securities clearing, execution and market
making, both floor-based and off-floor.
The big news in the Brokerage sector (XBD.X) last week was news
of the settlement between Merrill Lynch and NY Attorney General,
Eliot Spizter. While the news was initially perceived as
positive (as if a $100 mln 'settlement' isn't going to have a
ripple effect), which pushed many stocks in the sector up to
meaningful resistance. But the euphoria quickly faded as
investors once again came to terms with the fact that Merrill's
woes are likely just the tip of the iceberg. There are
class-action suits to be dealt with, and now the SEC is taking a
long hard look at industry practices. GS behaved just about how
we would expect shooting up near solid resistance near $82,
before spending the rest of the week sliding back towards the $78
support level. Adding to the bad news parade, news broke on
Friday that the now-defunct company eToys is suing GS for fraud
and breach of fiduciary duty, claiming that GS intentionally
under-priced its IPO in return for kickbacks from its customers.
Whether there is any merit to these claims isn't the issue; it
just adds one more weight that the stock and broader industry has
to bear. The stock has been caught in a persistent descending
trend since the first of April, and the trendline is currently
resting right at $80.50, the site of solid resistance for the
past month, with the only exception being the settlement-related
spike last week. Intraday rallies near this level should continue
to make for solid entry points ahead of the next leg lower,
particularly if the XBD index remains pinned under its 200-dma
(currently $473.75). Traders looking for a breakdown before
playing will need to wait for the stock to fall below $77.75 on
solid volume, but need to be cognizant of strong support waiting
near the $76 level, the site of the 62% retracement. For now,
entries on failed rallies provide the better risk-reward dynamic.
Lower stops to $81.
BUY PUT JUN-80*GS-RP OI=2797 at $3.70 SL=2.00
BUY PUT JUN-75 GS-RO OI=2678 at $1.55 SL=0.75
Average Daily Volume = 3.20 mln
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LEAPS
*****
Rally Ho??
By Mark Phillips
mphillips@OptionInvestor.com
Who's afraid of the Big, Bad Bear? Not many in the market place,
although you certainly wouldn't know that by looking at the price
action in the broad market averages last week. You can see the
lack of concern of significant downside action in the market by
the lethargic motion in the VIX, which is still holding below
the 22 level, despite the fact that none of the major averages
were able to sustain any upward motion. Looking under the
surface, we can see that with the light volume ahead of the long
weekend, the weakness appeared to be due to a lack of buyers,
rather than any heavy selling.
The other way to gauge the market's reluctance to head south is
by looking at some of the stocks that have been notably weak over
the past couple months. They just aren't dropping below support.
I noticed this in my own trading, as I have continued to probe
the downside on weak stocks in sectors such as Semiconductors,
Biotechs, Software and Brokers. While I've been marginally
successful, it has been a struggle to make a buck on the downside
and this is in stark contrast to the easy money that has been
available to the downside since mid-March.
As I reviewed my short-term trades at the end of the week, I found
that the trades that are performing the best are those that are of
the bullish stripe. The old trading axiom about never shorting a
dull market seems to be at play here, and I get the distinct
feeling that the markets want to go up. How long it will last
and how far it will go is still to be determined, but for now I'll
side with historical patterns. I'm looking for some decent upward
movement next week, in part due to the bullish pattern frequently
seen in the week after Memorial Day.
Does this mean that we can go long with abandon? Not by a long
shot! The markets are still in a very precarious position, and we
are rapidly approaching the summer doldrums, which are notoriously
unfriendly to the bulls. But with weekly charts starting to
emerge from oversold on most of the indices and sectors that I
track, I believe that the scales are currently tipped in favor of
the bulls, at least over the next week or two. We should be
better able to gauge the state of the markets by this time next
week, with more normal volume patterns likely to emerge after the
long weekend.
Trade the long side with caution, and keep one eye constantly on
the sentiment indicators like the VIX. Should they start to tip
in favor of the bears (say the VIX drops back into the 18-19 area)
then we'll want to exercise more caution with our bullish plays.
In the meantime play the upside for all it is worth. Just
remember that if we do in fact get a rally, it will be just the
latest bear-market rally, not the beginning of a new bull market.
Alright, enough of my rambling. Let's review our plays and then
get to the new ones.
Portfolio:
JNJ - As I mentioned last week, I am still undecided on our JNJ
play. I like the way it is holding support, but I want to see
the bulls push it up to challenge its highs in the $66 area
before I'll be convinced. The week after Memorial Day is
typically bullish, so maybe that pattern will hold, giving the
DOW and boost, with JNJ kicking back into its bullish mode again.
Dips are still buyable for new positions, but keep those stops in
place in case support fails to hold in the $59-60 area.
MDT - Hey, now that was a pretty decent entry. Let's see if MDT
has the ability to move through that first level of resistance.
Recall from our prior comments, that the first test for the stock
would be the descending trendline near $46.50. Well, MDT cleared
that nicely and moved right up to the $47.50 level, which also
marked the highs in April. With the daily Stochastics now deep
in overbought territory, we'd expect a bit of profit taking to
drop the play back into the $46 area to fill Thursday's gap. But
then we'll want to see the bulls take charge again, push through
current resistance and challenge the next significant level near
$49.
MSFT - The jury is still out (not that funny with this stock,
given its recent and ongoing troubles in the court system), as
MSFT meandered between $52-56 last week. We need to see Mr.
Softee push through the descending trendline at $57 and
historical resistance at $58 before we'll know that the trade is
truly going our way. Note that a print at $57 will give the
stock an ascending triple-top breakout on the PnF chart and will
also represent the first close over the bearish resistance line
since the stock was trading near $70 in early January.
XOM - There's our entry, thanks to a bit of weakness in the price
of Crude Oil last week. Our position was initiated at the close
on Wednesday, with a stop placed at $37.50, just below strong
support in the January-February timeframe.
Watch List:
PG - We've been hoping for a dip to give us a decent entry into
our PG play and it looks like it is currently underway.
Friday's lack of buying interest finally pushed PG back below the
center line of its ascending channel, and now all we need is to
see the price start to firm up and rebound. This could happen
near the $89-90 level and that would be a solid entry. With the
daily Stochastics still falling towards oversold though, we might
be lucky enough to capture an intraday dip near the bottom of the
channel in the vicinity of the $87 level. So long as PG doesn't
drop below the lower channel line on a closing basis, I think it
is safe to say that we'll be taking a position sometime next week.
Remember to wait for the bounce.
WMT - The price action in WMT certainly wasn't encouraging last
week with the stock drifting lower throughout the week and finally
dropping back under the 200-dma on Friday. It looks like we are
going to see the prior week's gap get filled and a rebound from
the bottom of that gap should provide our best entry point. Look
for renewed market strength after the long weekend to help WMT
find support and bounce near the $55 level. Should that level
fail as support, then we'll need to wait for the rebound to
materialize at a lower level and push back through the 200-dma
before taking a position. Don't try to catch a falling knife.
Wait for the bounce before playing.
BRCM - Is anyone else losing patience with BRCM? The bulls are
really trying to find support, but it certainly wasn't encouraging
to see a drop below the $24 level. I am now convinced that the
stock is headed back to test its September lows, but I could be
wrong. I would prefer to get the decline out of the way so that
we can go long, rather than suffering this slow bleed. I have
lowered our entry target to the $18-20 area and that is where
I'll be looking to take a position. More aggressive players can
try to game a bounce from current levels that is successful in
pushing the stock back above the $26 area, but such an endeavor
should be accompanied by a tight stop just below the recent lows
($23.50) along with confirmation from the SOX showing some solid
bullish action.
AMAT - The analyst war in the Semiconductor sector last week,
knocked AMAT back for a tumble on Friday and it remains to be
seen whether it can maintain its position above the bullish
support line, currently at $23. I'm lowering our entry target to
$23-24. We want to see the stock rebound from current levels
next week and move through $24 before taking a position and then
our stop will be placed at $21, just below the 200-dma.
BBH - The Biotechnology sector is trying valiantly to get some
bullish action going, and it looks like the good news from BGEN
on Thursday might be just the ticket. Let the round of profit
taking following Thursday's huge ramp job settle out before
taking a position, and then hold on for what promises to be a
wild ride. This sector is not for the faint of heart, as
volatility reigns supreme!
Hopefully my description last Wednesday gave you a good
understanding of how the introduction of the 2005 LEAPS will
progress over the next couple months. Even though the Cycle 1
stocks like MSFT and XOM have had the symbols released for the
2005 LEAPS, I'm going to wait until there is some Open Interest
and price data before adding them into our play writeups and
Watch List and Portfolio. I would expect to start listing the
2005's within the next couple of weeks and by the end of July we
will begin to phase out our coverage of the 2003's as they begin
to behave more like normal options (read: time decay).
While last week could hardly be described as bullish (or the
beginning of any sort of rally) as I had expected, I think we are
on the cusp of some significant bullish action. Should the major
indices and sectors (like the Semiconductors and Biotechs) manage
to hold firm at support, we could be off to the races, at least
for a little while.
Enjoy your Holiday weekend and take some time to remember what
Memorial Day is dedicated to -- all of the servicemen (and women)
that have given their lives on the field of battle so that we can
enjoy the freedoms we have.
Mark
LEAPS Portfolio
Current Open Plays
SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP
Calls:
JNJ 03/05/02 '03 $ 65 JNJ-AM $ 3.30 $ 2.95 -10.60% $58.50
'04 $ 65 LJN-AM $ 6.40 $ 6.50 + 1.56% $58.50
MDT 05/15/02 '03 $ 45 VKD-AI $ 4.00 $ 5.50 +37.50% $42
'04 $ 45 LKD-AI $ 7.30 $ 9.00 +23.29% $42
MSFT 05/13/02 '03 $ 55 MSQ-AK $ 5.90 $ 6.00 + 1.69% $48
'04 $ 55 LMF-AK $10.20 $11.10 + 8.82% $48
XOM 05/22/02 '03 $ 40 XOM-AH $ 3.00 $ 3.10 + 3.33% $37.50
'04 $ 40 LXO-AH $ 5.10 $ 5.20 + 1.96% $37.50
Puts:
None
LEAPS Watchlist
Current Possibles
SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL
CALLS:
BRCM 10/28/01 $18-20 JAN-2003 $ 25 OGJ-AE
CC JAN-2003 $ 20 ORD-AD
JAN-2004 $ 25 LGJ-AE
CC JAN-2004 $ 20 LGJ-AD
PG 03/31/02 $89-90, $87 JAN-2003 $ 95 PG -AS
CC JAN-2003 $ 90 PG -AR
JAN-2004 $ 95 LPR-AS
CC JAN-2004 $ 90 LPR-AR
WMT 03/31/02 $55 JAN-2003 $ 60 VWT-AL
CC JAN-2003 $ 55 VWT-AK
JAN-2004 $ 60 LWT-AL
CC JAN-2004 $ 55 LWT-AK
AMAT 05/12/02 $23-24 JAN-2003 $ 27 ANQ-AY
CC JAN-2003 $ 25 ANQ-AE
JAN-2004 $ 30 LPJ-AF
CC JAN-2004 $ 25 LPJ-AE
BBH 05/26/02 $95-96 JAN-2003 $100 GBZ-AT
CC JAN-2003 $ 95 GBZ-AS
JAN-2004 $100 KBB-AT
CC JAN-2004 $ 95 KOV-AS
PUTS:
None
New Portfolio Plays
XOM - Exxon Mobil $40.43 ** Call Play **
Well, that didn't take long! It was nice to have the price of
Crude Oil cooperate by showing a bit of weakness last week
(dropping back to the $27 level), and that was enough to pull
shares of XOM down to the $39.50 area early in the week. After
a bit of nip and tuck action, the stock managed to push back
above the $40 level on Wednesday, closing at $40.43. That was
good enough for us to take our entry, as it gives us a decent
upside target near the $44-45 level. This represented a
significant top for the stock in March, just like it did a year
ago. With the Oil sector still maintaining its solid upward
trend, and likely to continue to do so with the unsettled
situation in the Middle East, XOM should track higher as we head
into the heavy summer driving season. Repeated dips into the
$39-40 area can still be used for new entries as the Weekly
Stochastics is just emerging from oversold territory, indicating
that there is solid upside available in the stock over the next
several weeks. We are initiating the play with our stop set at
$37.50 and will look to close the play when it reaches the $44-45
area. That gives us a risk of $2.50 and a potential reward of
$4-5. Due to the limited range we are attempting to capture, I
think you can understand why we are using ATM contracts rather
than OTM. We want to capture a solid delta move during a fairly
small move in the underlying stock.
BUY LEAP JAN-2003 $45 XOM-AH $3.00
BUY LEAP JAN-2004 $45 LXO-AH $5.10
New Watchlist Plays
BBH - Biotechnology HOLDR $98.30 **Call Play**
Since the Biotechnology index (BTK.X) broke down below the
pivotal $450 support level in late April, investors in this
sector have been praying for a catalyst to give them hope that a
bottom was in place. The picture was dire for the first couple
weeks in May as the BTK toyed with another critical support
level ($378), which had been the bottom of the sector's range
since early 2000. Since bouncing from that level 2 weeks ago,
the sector has been seesawing its way higher in volatile fashion,
still waiting for that bullish catalyst. That catalyst arrived
just in time on Thursday, with the FDA advisory panel deciding
to recommend BGEN's psoriasis drug, Amevive for approvability.
The action surrounding this decision created some interesting
dynamics in the BTK due to the fact that BGEN was halted for
trade throughout the day. Investors appeared to utilize the BBH
to take advantage of the likelihood of a favorable outcome and
on Thursday the BBH ramped higher by more than 7.5% on heavy
volume that more than doubled the ADV. Sure enough, BGEN had a
stellar day on Friday, gaining more than 22% while the BBH fell
back by 3.5%. My read of this action is that once the news was
known and BGEN was open for trade, investors unwound their
positions in the BBH in favor of holding BGEN. While there is
likely to be more weakness in the BBH before it is ready to run
higher, I look at the FDA approval as a watershed event for the
sector as it marks a change from recent actions by the FDA where
they have been extremely stingy with granting drug approvals.
Keep in mind that this is still a tentative approval, but I
think it bodes well for the action in the sector over the
intermediate term. Note that the weekly Stochastics oscillator
has solidly begun its advance northwards, and this bodes well
for a continuation of the emerging bullish trend. Ideally, I
would like to see the BBH come back to confirm support in the
$95-96 area (the bottom of the fledgling ascending channel)
before initiating new positions, and this should correspond to
the daily Stochastics bottoming out near oversold territory.
We could see a brief dip as $93 before the Stochastics reach
oversold, but I wouldn't want to buy a bounce that low until
price advanced back over the $95 level again. Once our entry
point is achieved, look to set stops just below the recent lows
at $88.50, which correspond to the recent relative lows in the
BTK near $378. Should this level be broken, then we'll want to
be out of the play in a hurry as it will likely point to
significant weakness in the near future.
BUY LEAP JAN-2003 $100 GBZ-AT
BUY LEAP JAN-2003 $ 95 GBZ-AS For Covered Call
BUY LEAP JAN-2004 $100 KBB-AT
BUY LEAP JAN-2004 $ 95 KOV-AS For Covered Call
Drops
None
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The Option Investor Newsletter Sunday 05-26-2002
Sunday 5 of 5
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COVERED CALLS
*************
Option Trading 101: Q&A With The Editor
By Mark Wnetrzak
This week, one of our readers had a question about the assignment
of "in-the-money" options and another subscriber commented on the
unusually low trading activity in a recent position.
Subject: In-the-money options
Attn: Mark Wnetrzak
Dear Mark,
Please explain what happens in this scenario:
I write a call with a $5 strike against a long $5 strike LEAPS,
which is [much] further out in time. The calls are "in-the-money"
at expiration of the short call. Do I lose the time value of the
long call or would the broker normally sell the long and buy the
short [for me]?
Thanks.
JL
JL,
First of all, a broker generally doesn't do anything except assign
your account a short position (you'd be short 100 shares for every
call written). If you are forced to reconcile the account (as you
didn't buy back the short call), you may be required to exercise
the LEAP to cover. Of course, with the stock near $5, it may be
prudent to simply buy (to cover) the underlying stock, which would
let you keep the LEAP (and the time value you paid for), depending
on your outlook.
Remember, if the short call moves deep-in-the-money fairly quickly,
it could be exercised well before expiration. I suggest reading
"Options: As A Strategic Investment," by Lawrence McMillan, which
covers all aspects of option trading and is an excellent resource
for any option trader.
Regards,
Mark W.
OIN
Subject: No interest in QSFT options?
Attn: Covered-calls editor
Good evening,
In Sunday's recommendations, QSFT was recommended for both the June
15 call [covered-call] and the June 15 put [short]. I have been
watching this stock and I am curious why there is no play [volume]
or seemingly any interest in the June 12.5 put paying .75? Not one
single contract sold and very little open interest. Can you help me
understand this?
Thank you,
JS
JS,
First, thanks for using the OIN to supplement your search for
profitable trading positions. All of us on the newsletter
staff pride ourselves in working for a family-owned company that
provides some of the best stock/option research at a reasonable
price. Regarding the lack of volume in the $15 and $12.50 Put
options; part of the reason may be that the May options recently
expired and traders simply haven't moved into the June series.
Another reason could be the Market itself, as selling naked-puts
is a neutral to bullish strategy and with the current worrisome
environment (economic and political), many traders are sitting on
the sidelines. Also, the majority of retail traders don't have
the ability to sell options "naked" so with the recent rally off
the early May low, they may be speculating on the future share
price of Quest Software by buying calls. This way they have a
fixed risk (the price of the call) with an unlimited reward
potential as opposed to selling a naked put which offers a large
risk (stock drops to zero) for a low potential reward. Not to
mention that with volatility near historic lows (look at the VIX
and VXN), most stock options are relatively cheap. Professional
traders prefer to buy options when they are cheap and sell them
when they are expensive.
Hope this helps,
Mark W
OIN
SUMMARY OF PREVIOUS CANDIDATES
*****
Note: Margin not used in calculations.
Stock Price Last Call Strike Price Gain Potential
Symbol Picked Price Month Sold Picked /Loss Mon. Yield
MACR 20.32 22.00 JUN 20.00 2.25 *$ 1.93 7.7%
INFA 8.16 8.63 JUN 7.50 1.30 *$ 0.64 6.8%
UNTD 11.00 11.00 JUN 10.00 1.75 *$ 0.75 5.9%
USU 9.34 8.05 JUN 7.50 2.30 *$ 0.46 5.7%
INET 7.95 7.50 JUN 7.50 0.90 $ 0.45 5.5%
NTIQ 22.10 23.08 JUN 20.00 3.50 *$ 1.40 5.5%
RETK 27.45 25.04 JUN 25.00 3.90 *$ 1.45 5.4%
QSFT 15.06 14.17 JUN 15.00 1.70 $ 0.81 5.3%
PCLE 10.59 10.42 JUN 10.00 1.15 *$ 0.56 5.2%
VVTV 21.99 21.75 JUN 20.00 3.10 *$ 1.11 5.1%
PCSA 14.12 12.86 JUN 12.50 2.30 *$ 0.68 5.0%
GIVN 13.99 14.12 JUN 12.50 2.25 *$ 0.76 4.7%
SIE 18.50 17.88 JUN 17.50 2.00 *$ 1.00 4.4%
*$ = Stock price is above the sold striking price.
Comments:
Memorial Day: A time to reflect on the sacrifice of the few for
the good of the many. Thanks Dad! How you made it through Iwo
Jima, I'll never know...
As we move into the Summer Doldrums, two stocks are on our
early-exit watch list this week: Quest Software (NASDAQ:QSFT)
and AirGate PCS (NASDAQ:PCSA).
Positions Closed: Northfield Labs (NASDAQ:NFLD) and Endocare
(NASDAQ:ENDO)
NEW CANDIDATES
*********
Sequenced by Company
*****
Stock Last Call Strike Option Last Open Cost Days Target
Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield
CKFR 23.76 JUN 22.50 FCQ FX 2.25 93 21.51 27 5.2%
MEDC 14.00 JUN 12.50 MQH FV 2.00 192 12.00 27 4.7%
MIPS 7.61 JUN 7.50 MUP FU 0.65 88 6.96 27 8.7%
SRP 7.81 JUN 7.50 SRP FU 0.75 665 7.06 27 7.0%
USU 8.05 JUN 7.50 USU FU 1.10 2187 6.95 27 8.9%
VSNX 11.49 JUN 10.00 MQB FB 1.90 236 9.59 27 4.8%
VVTV 21.75 JUN 20.00 UVR FD 2.40 823 19.35 27 3.8%
Sequenced by Target Yield (monthly basis)
*****
Stock Last Call Strike Option Last Open Cost Days Target
Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield
USU 8.05 JUN 7.50 USU FU 1.10 2187 6.95 27 8.9%
MIPS 7.61 JUN 7.50 MUP FU 0.65 88 6.96 27 8.7%
SRP 7.81 JUN 7.50 SRP FU 0.75 665 7.06 27 7.0%
CKFR 23.76 JUN 22.50 FCQ FX 2.25 93 21.51 27 5.2%
VSNX 11.49 JUN 10.00 MQB FB 1.90 236 9.59 27 4.8%
MEDC 14.00 JUN 12.50 MQH FV 2.00 192 12.00 27 4.7%
VVTV 21.75 JUN 20.00 UVR FD 2.40 823 19.35 27 3.8%
Company Descriptions
LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even
point, DE-Days to Expiry, TY-Target Yield (monthly basis).
*****
CKFR - Checkfree $23.76 *** New Trading Range! ***
Checkfree Corporation (NASDAQ:CKFR) is a provider of electronic
billing and payment services. The company operates its business
through three independent but inter-related divisions including
Electronic Commerce, Investment Services and Software. The
company's electronic commerce services are primarily targeted to
consumers through financial institutions and Internet portals.
Checkfree offers portfolio management and information services
for fee-based money managers and financial planners within
investment advisory firms, brokerage firms, banks and insurance
companies. Checkfree is also a provider of electronic commerce
and financial applications software and services for businesses
and financial institutions. It designs, markets, licenses and
supports software products for automated clearinghouse processing,
reconciliation and regulatory compliance. The recent rally in
CKFR has put the issue in a new trading range and traders can
speculate conservatively on continued bullish activity with this
position.
JUN 22.50 FCQ FX LB=2.25 OI=93 CB=21.51 DE=27 TY=5.2%
*****
MEDC - Med-Design $14.00 *** Bottom-Fishing! ***
Med-Design (NASDAQ:MEDC) principally is engaged in the design,
development and licensing of safety medical devices intended to
reduce the incidence of accidental needle-sticks. Each safety
medical device the company designs and develops incorporates
its proprietary needle retraction technology. Med-Design’s
technology enables health care professionals to retract a needle
into the body of the medical device for safe disposal without
any substantial change in operating technique. The company's
products generally can be categorized into four groups: hypo-
dermic syringes used to inject drugs and other fluids into the
body; fluid collection devices used to draw blood or other fluids
from the body; venous and arterial access devices used to provide
access to patients' veins and arteries; and specialty safety
devices for other needle based applications. A new contract
announced on Thursday with Sultan Chemists will help Med-Design
market the Safety Dental Injector directly to dentists. This
appears to have spurred a rally this week and the move above
the early May high is encouraging. A reasonable cost basis
near historical support on a consolidating issue.
JUN 12.50 MQH FV LB=2.00 OI=192 CB=12.00 DE=27 TY=4.7%
*****
MIPS - MIPS Technologies $7.61 *** Bottom-Fishing: Part II ***
MIPS Technologies (NASDAQ:MIPS) is a designer of high-performance
and low power consumption processors, cores and related intellectual
property for use in a wide variety of increasingly sophisticated
consumer and business products. The company's industry standard
designs are based on its 32- and 64-bit reduced instruction set
computing (RISC) architectures. MIPS licenses its designs and
related intellectual property to semiconductor companies and system
original equipment manufacturers (OEMs). MIPS currently has more
than 50 licenses in place with companies around the world. The
recent strength in MIPS started at the end of April after the
company announced a licensed agreement with Advanced Micro Devices
(NYSE:AMD), which allows AMD to develop 64-bit processors that
implement the MIPS64 architecture standard in addition to its
current product line of processors based on the MIPS32(TM) archi-
tecture standards. MIPS Technologies is the only company in the
embedded processor industry to openly license a 64-bit architecture.
We simply favor the technical support near $7 and the increasing
trading volume as MIPS rallies off the April low.
JUN 7.50 MUP FU LB=0.65 OI=88 CB=6.96 DE=27 TY=8.7%
*****
SRP - Sierra Pacific $7.81 *** Is The Bad News Discounted? ***
Sierra Pacific Resources (NYSE:SRP) is an energy company engaged
in electricity generation and distribution, and in natural gas
transmission and distribution. The company operates through 2
major utility companies and 6 other, mostly gas-related, companies.
Sierra Pacific’s subsidiaries are: Nevada Power Company, Sierra
Pacific Power Company, Tuscarora Gas Pipeline Company, Sierra
Pacific Communications, Sierra Energy Company, dba e. three,
Sierra Pacific Energy Company, Lands of Sierra and Nevada Electric
Investment Company. SRP rallied Thursday after Nevada regulators
said that Nevada Power can recover $16 million from ratepayers
earlier than was previously allowed, increasing the utility's
summer cash flow. It isn’t much, considering that PUC of Nevada
has hampered Nevada Power’s attempt to recover $437 million of
about $922 million it had been seeking, but it’s a start. Will
the recent management shakeout help? For the short-term, this
position offers a reasonable entry point for those investors
who believe the Utility sector is "bottoming." Speculators only
please!
JUN 7.50 SRP FU LB=0.75 OI=665 CB=7.06 DE=27 TY=7.0%
*****
USU - USEC $8.05 *** The Russian Connection? ***
USEC (NYSE:USU), global energy company, is in the production and
sale of uranium fuel enrichment services for commercial nuclear
power plants. For the nine months ended 3/31/02, revenues were
up 30% to $1.11 billion while net income fell 87% to $9.1 million.
Revenues reflect an increase in the volume of standard units of
uranium enrichment and earnings were offset by higher cost of
sales as a percentage of revenue due to lower production level.
No recent news to explain the surge in USEC's price though the
message boards are alive with rumors. Maybe it’s speculation
on improved relations with Russia as the company’s new terms
with USEC’s Russian partner have yet to be approved by the U.S.
and Russian governments. The technical indications suggest the
issue has successfully completed its recent consolidation and is
poised for future gains. Conservative speculation with a cost
basis at a solid technical support area.
JUN 7.50 USU FU LB=1.10 OI=2187 CB=6.95 DE=27 TY=8.9%
*****
VSNX - Visionics $11.49 *** Merger Mania? ***
Visionics (NASDAQ:VSNX) is a worldwide producer of identification
technologies and systems. Through its respective business lines,
FaceIt, live scan and IBIS, the company designs and manufacturers
forensic quality biometric identification systems and develops
and deploys facial recognition technology. The FaceIt technology
enables a broad range of products and applications built by OEMs,
VARs and system integrators. The TENPRINTER and FingerPrinter CMS
are live scan systems used by government agencies, law enforcement,
airports, banks and other commercial institutions. The IBIS is a
remote identification system that combines expertise in biometric
capture and connectivity, and is capable of capturing both forensic
quality fingerprints and photographs for transmission to law
enforcement and other legacy databases. The SEC announced this
week that it had finished reviewing the preliminary joint proxy
statement for the merger of Identix (NASDAQ:IDNX) and Visionics.
Identix in February said it would buy rival Visionics for $269
million in stock. On Thursday, Visionics announced that its
latest FaceItŪ ARGUS surveillance system will be used to augment
security measures at the Battery Park Screening Facility in the
ferry embarkation area to Ellis Island and the Statue of Liberty
in the New York harbor during this Memorial Day holiday weekend.
We simply favor the technical support near the cost basis in this
position and investors who are interested in a portfolio position
in the electronic security sector should consider this issue.
JUN 10.00 MQB FB LB=1.90 OI=236 CB=9.59 DE=27 TY=4.8%
*****
VVTV - ValueVision $21.75 *** A Record First Quarter ***
ValueVision (NASDAQ:VVTV) is an integrated direct marketing company
that markets its products directly to consumers through various
forms of electronic media. VVTV also conducts business under the
corporate name ValueVision Media. The company's operating strategy
incorporates television home shopping, Internet e-commerce, vendor
programming sales and fulfillment services. The company's principal
electronic media activity is its television home shopping business,
which uses recognized on-air television home shopping personalities
to market brand name and proprietary/private label consumer products
at competitive prices. Last week, ValueVision announced that it had
replaced Arthur Andersen with Deloitte & Touche as their independent
auditors. This week ValueVision reported a small quarterly profit
as it wrote down fewer investments and booked more revenue from its
ShopNBC.com site. More importantly, the company is expecting future
sales of $128 million to $133 million, up 22% to 27%. We simply
favor the recent break-out above the MAR - APR resistance area
(which is now support), which suggest higher prices in the near
future. This position offers a conservative method to profit on
the near-term movement of the company's share value.
JUN 20.00 UVR FD LB=2.40 OI=823 CB=19.35 DE=27 TY=3.8%
*****
*****************
SUPPLEMENTAL COVERED CALL CANDIDATES
*****************
The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions. As
with any investment, you must decide if the selections meet your
criteria for potential plays. Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook. They will not be included in
the weekly portfolio summary.
Sequenced by Target Yield (monthly basis)
*****
Stock Last Call Strike Option Last Open Cost Days Target
Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield
GNSS 25.00 JUN 22.50 QFE FX 3.60 841 21.40 27 5.8%
EXTR 11.33 JUN 10.00 EXJ FB 1.80 2319 9.53 27 5.6%
PCLE 10.42 JUN 10.00 PUC FB 0.85 106 9.57 27 5.1%
IMCO 13.34 JUN 12.50 IQZ FV 1.35 62 11.99 27 4.8%
MACR 22.00 JUN 20.00 MRQ FY 2.80 130 19.20 27 4.7%
INVN 24.02 JUN 20.00 FQQ FD 4.80 1643 19.22 27 4.6%
KROL 21.00 JUN 20.00 KRQ FD 1.75 243 19.25 27 4.4%
EMMS 30.70 JUN 30.00 QMJ FF 1.70 123 29.00 27 3.9%
NTIQ 23.08 JUN 20.00 CQJ FD 3.70 38 19.38 27 3.6%
*****************
NAKED PUT SECTION
*****************
Investing 101: Using S&P 500 Futures To Determine Market Trends
By Ray Cummins
The term "Fair Value" emerged in one of my E-mails this week
but it was not in reference to an option's price; rather it was
described as an indicator that futures traders use to determine
the market's directional bias prior to the open.
Futures Fundamentals
A futures contract is the obligation to take delivery (long) or
make delivery (short) of an underlying commodity. The contract
sets the price of a commodity (corn, wheat, oil, etc) at a point
in time in the future. As an example, a farmer grows wheat and
wants to sell it to a cereal company. The cereal company wants
to buy the wheat, but not until next September so they decide to
buy a futures contract from the farmer to deliver the wheat at a
fixed (strike) price. Since market conditions are influenced by
how much wheat is planted, weather conditions, and other outside
factors, the price of wheat will vary, as will the value of the
futures contract. If the price of wheat is rising in the market,
the futures contract becomes more valuable and can be sold at a
profit. The opposite can happen if the price of wheat declines.
The option exchanges know that trading futures contracts can be
profitable so they have devised instruments not only for tangible
commodities but for stock indexes as well.
With stock index futures, a trader has a choice between buying a
basket of stocks equivalent to the S&P 500, or another index in
the cash market and buying a futures contract. You can buy an
S&P 500 futures contract which points to a particular value at a
specific point in time and you can also sell this contract as its
value changes. In the case of an S&P 500 index future, the owner
is contracting to receive a predetermined amount ($250 x Index)
on the third Friday of the expiration month. This contract is
settled in cash (not by delivering a basket of all 500 stocks in
the index) and each point on the index is worth $250. If a trader
buys stocks with cash, he will incur an opportunity cost, as he
could have simply invested in Treasury bills at no risk. Because
futures contracts do not require an up-front payment (other than
their margin requirement), they do not incur an opportunity cost,
and therefore one should be willing to pay more for futures than
for the stocks themselves. However, the owner of the stock will
receive the stock's dividend (and the interest on that dividend)
whereas the owner of futures contract receives nothing. This is
a holding cost of the futures and the difference between the index
futures price and the price of the cash stock index is called the
"basis." When this basis rises to a level where a trader can buy
the cash stocks at the "ask" and sell the futures at the "bid,"
and cover all of the holding costs, computer programs will try to
take advantage of the situation. In contrast, when the futures
decline too far (relative to the cash price), arbitrageurs will
try to sell the stocks and buy the undervalued futures contracts.
Understanding "Fair Value" In Futures
Futures also have what is called "fair value" and that number is
determined by adding the interest cost of holding the stocks and
subtracting the expected dividends. Higher interest rates will
expand the basis, as will lower dividend rates. For example, if
a futures contract has a fair value of 5 points, the average price
of the instrument should be 5 points above SPX (cash S&P). When
the price moves above or below fair value, a change in the future
direction of the market is implied. This is called the "market
indicator" of the futures and it reflects public sentiment that
provides both offensive and defensive trading opportunities, and
allows institutional investors to gauge their portfolio's return
relative to a benchmark. For instance, when S&P 500 futures are
trading 5 points above fair value, the actual market open should
be 40-50 points higher on the Dow (8 - 10 / 1 ratio) and at least
a few points higher on the S&P 500 index.
The underlying reason for pre-market futures trading is simple:
fund managers and institutional investors use futures to increase
or reduce exposure to the equities markets as their cash holdings
dictate. In addition, many professional traders maintain large
positions that can be significantly affected by market direction.
Since the most popular index options (OEX, SPX, NDX) on the CBOE
do not trade until a large majority of the underlying issues are
active, futures are often the only way to manage losses and lock-
in gains when unexpected economic data or major news threatens
one's portfolio value.
Good Luck!
*** WARNING!!! ***
Occasionally a company will experience catastrophic news causing
a severe drop in the stock price. This may cause a devastatingly
large loss which may wipe out all of your smaller gains. There is
one very important rule; Don't sell naked puts on stocks that you
don't want to own! It is also important that you consider using
trading STOPS on naked option positions to help limit losses when
the stock price drops. Many professional traders suggest closing
the position when the stock price falls below the sold strike or
using a buy-to-close STOP at a price that is no more than twice
the original premium from the sold option.
SUMMARY OF PREVIOUS CANDIDATES
*****
Stock Price Last Call Strike Price Gain Potential
Symbol Picked Price Month Sold Picked /Loss Mon. Yield
WFR 8.30 7.70 JUN 7.50 0.60 *$ 0.60 13.9%
ENDP 11.56 12.85 JUN 10.00 0.55 *$ 0.55 9.5%
MACR 23.89 22.00 JUN 20.00 0.60 *$ 0.60 8.3%
AMZN 19.16 19.47 JUN 15.00 0.40 *$ 0.40 8.2%
RMCI 27.46 30.71 JUN 22.50 0.70 *$ 0.70 7.5%
CKFR 23.89 23.76 JUN 20.00 0.65 *$ 0.65 7.4%
PLXS 28.00 25.83 JUN 25.00 0.75 *$ 0.75 7.3%
GG 18.71 22.16 JUN 17.50 0.70 *$ 0.70 7.3%
FLM 25.35 24.28 JUN 22.50 0.80 *$ 0.80 7.2%
HDWR 18.42 17.52 JUN 17.50 0.70 *$ 0.70 7.1%
RMCI 31.23 30.71 JUN 25.00 0.55 *$ 0.55 7.0%
PHSY 30.06 27.62 JUN 25.00 0.60 *$ 0.60 6.9%
SIE 19.88 17.88 JUN 17.50 0.65 *$ 0.65 6.5%
PHSY 25.87 27.62 JUN 20.00 0.50 *$ 0.50 6.4%
TTWO 25.60 25.50 JUN 20.00 0.40 *$ 0.40 6.3%
AMZN 16.94 19.47 JUN 12.50 0.30 *$ 0.30 5.9%
DCN 22.67 22.30 JUN 20.00 0.45 *$ 0.45 5.7%
TDY 19.17 21.24 JUN 17.50 0.60 *$ 0.60 5.6%
RDC 26.12 25.92 JUN 22.50 0.50 *$ 0.50 4.9%
*$ = Stock price is above the sold striking price.
Comments:
The bearish trend in U.S. equities resumed Friday as investors
opted to exit long positions ahead of the holiday weekend. The
current outlook among the general public is one of apprehension
and anxiety and there is little chance of any significant change
in that attitude in the near future. With that idea in mind, we
will continue to focus on limiting downside losses and we will
establish new positions only on those stocks with very favorable
long-term potential or outstanding technical patterns. Issues
on the watch-list (that should be closed breaking recent support
areas or trend-lines) include: Sierra Health Services (NYSE:SIE),
Headwaters (NASDAQ:HDWR), Plexus (NASDAQ:PLXS), Memc Electronic
(NYSE:WFR) and Pacific Healthcare Systems (NASDAQ:PHSY).
Positions Closed:
Endocare (NASDAQ:ENDO)
NEW CANDIDATES
*********
Sequenced by Company
*****
Stock Last Call Strike Option Last Open Cost Days Target
Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield
ADRX 45.22 JUN 35.00 QAX RG 0.70 1312 34.30 27 8.1%
AMZN 19.47 JUN 17.50 ZQN RO 0.65 4043 16.85 27 11.3%
IDXX 31.10 JUN 30.00 IQX RF 0.55 55 29.45 27 5.2%
MACR 22.00 JUN 17.50 MRQ RW 0.25 164 17.25 27 6.1%
NOVN 24.37 JUN 22.50 NPQ RX 0.50 8 22.00 27 6.7%
TDY 21.24 JUN 20.00 TDY RD 0.50 4 19.50 27 7.3%
TTWO 25.50 JUN 20.00 TUO RD 0.30 325 19.70 27 6.3%
WIN 19.20 JUN 17.50 WIN RW 0.30 106 17.20 27 5.4%
Sequenced by Target Yield (monthly basis)
******
Stock Last Call Strike Option Last Open Cost Days Target
Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield
AMZN 19.47 JUN 17.50 ZQN RO 0.65 4043 16.85 27 11.3%
ADRX 45.22 JUN 35.00 QAX RG 0.70 1312 34.30 27 8.1%
TDY 21.24 JUN 20.00 TDY RD 0.50 4 19.50 27 7.3%
NOVN 24.37 JUN 22.50 NPQ RX 0.50 8 22.00 27 6.7%
TTWO 25.50 JUN 20.00 TUO RD 0.30 325 19.70 27 6.3%
MACR 22.00 JUN 17.50 MRQ RW 0.25 164 17.25 27 6.1%
WIN 19.20 JUN 17.50 WIN RW 0.30 106 17.20 27 5.4%
IDXX 31.10 JUN 30.00 IQX RF 0.55 55 29.45 27 5.2%
Company Descriptions
LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even
point, DE-Days to Expiry, TY-Target Yield (monthly basis).
*****
ADRX - Andrx Corporation $45.22 *** Recovery Underway! ***
Andrx Corporation (NASDAQ:ADRX) commercializes controlled-release
oral pharmaceuticals using proprietary drug delivery technologies.
The company has nine proprietary controlled-release drug delivery
technologies that are patented for certain applications or for
which it has filed for patent protection for certain applications.
Andrx uses its proprietary delivery technologies and formulation
skills to develop bio-equivalent versions of selected controlled
release brand name pharmaceuticals, and other controlled release
formulations of existing immediate-release or controlled-release
drugs. The company is also developing bio-equivalent versions of
specialty, niche and immediate-release pharmaceutical products.
Traders who like the outlook for Andrx and its unique products can
establish a discounted cost basis in the issue with this position.
JUN 35.00 QAX RG LB=0.70 OI=1312 CB=34.30 DE=27 TY=8.1%
*****
AMZN - Amazon.com $19.47 *** Entry Point! ***
Amazon.com (NASDAQ:AMZN) is a Website where customers can find and
discover anything they may want to buy online. The company lists
millions of unique items in categories such as books, music, DVDs,
videos, consumer electronics, toys, camera/photo items, software,
computer and video games, tools and hardware, lawn & patio items,
kitchen products, and wireless products. Through its Marketplace,
Auctions and zShops services, any business or individual can sell
virtually anything to the company's 30 million customers, and with
Amazon.com Payments, sellers can accept credit card transactions.
In addition to its U.S.-based Website, the company operates four
internationally focused Websites: www.amazon.co.uk, www.amazon.de,
www.amazon.fr and www.amazon.co.jp. The company also operates the
Internet Movie Database (www.imdb.com), a source of information on
movies and entertainment titles, and cast and crewmembers. Shares
of Amazon.com have rallied in recent weeks and the issue appears
to be comfortably established in a new trading range near $18-$19.
Investors who wouldn't mind owning the stock at a low risk cost
basis can speculate its future performance with this position.
JUN 17.50 ZQN RO LB=0.65 OI=4043 CB=16.85 DE=27 TY=11.3%
*****
IDXX - IDEXX Laboratories $31.10 *** Rally In Progress! ***
IDEXX Laboratories (NASDAQ:IDXX) develops, manufactures and sells
products and provides various services for veterinary, food and
environmental markets. The company's products and services include
point-of-care veterinary diagnostic products; laboratory and also
consulting services for veterinarians; veterinary pharmaceutical
products; information products and services, including software
used in animal health applications; diagnostic/health monitoring
products and services for production animals; products that test
water for certain microbiological contaminants, and products that
test milk for antibiotic residues. There's no "public" news to
explain the recent high-volume rally but traders who think that
something positive is in the works can speculate on that outcome
in a conservative manner with this position.
JUN 30.00 IQX RF LB=0.55 OI=55 CB=29.45 DE=27 TY=5.2%
*****
MACR - Macromedia $22.00 *** Entry Point! ***
Macromedia (NASDAQ:MACR) develops, markets, and supports software
products, technologies, and services that enable people to define
what the Web can be. The company's customers, from developers to
enterprises, use Macromedia solutions to help build compelling and
effective Websites and eBusiness applications. As a result of the
deconsolidation of shockwave.com, the company operates in one major
business segment, the Software segment. Shares of web-publishing
software company Macromedia soared in April after the company said
it expects to return to profitability, on a pro-forma basis, in the
June quarter, and remain "in the black" for the rest of the year.
Also, revenue showed sequential growth for the first time in a year,
and the top line should grow another 10% sequentially in the June
quarter, due to a slew of new products that have been released or
are scheduled for release in the next few of months. In addition,
MACR recently announced the release of several upgrades to its Web
software products and on May 10, the company received a favorable
verdict in its counterclaims lawsuit against Adobe (NASDAQ:ADBE).
Investors can establish a very conservative cost basis in the stock
with this position.
JUN 17.50 MRQ RW LB=0.25 OI=164 CB=17.25 DE=27 TY=6.1%
*****
NOVN - Noven Pharmaceuticals $24.37 *** FDA Approval! ***
Noven Pharmaceuticals (NASDAQ:NOVN) is engaged in the development
and manufacture of advanced transdermal drug delivery products
and technologies and prescription transdermal products. Noven's
principal commercialized products are transdermal drug delivery
systems for use in hormone replacement therapy. The company's
first major product was an estrogen patch for the treatment of
menopausal symptoms marketed under the brand name Vivelle in the
United States and Canada, and under the brand name Menorest in
Europe and other markets. Noven's second-generation estrogen
patch was launched in the United States under the brand name
Vivelle-Dot. This product is expected to be launched in 2002 in
several foreign countries under the brand name Estradot. Noven
also developed a combination estrogen/progestin transdermal patch
for the treatment of menopausal symptoms, which is marketed under
the brand name CombiPatch in the U.S. and under the brand name
Estalis in Europe and certain other markets. On Monday, Noven
received Food and Drug Administration approval for the expanded
use of their Vivelle-Dot in the prevention of postmenopausal
osteoporosis. The shares rallied on the news and the move to a
new trading range suggests further upside potential in the near
future.
JUN 22.50 NPQ RX LB=0.50 OI=8 CB=22.00 DE=27 TY=6.7%
*****
TDY - Teledyne $21.24 *** Up, Up And Away! ***
Teledyne Technologies (NYSE:TDY) is a provider of sophisticated
electronic components, instruments and communications products,
including data acquisition and communications equipment for
airlines and business aircraft, monitoring and control instruments
for industrial and environmental applications and components, and
subsystems for wireless and satellite communications. Teledyne
also provides systems engineering solutions and other information
technology services for space, defense and industrial applications,
and makes general aviation and missile engines and components, as
well as onsite gas and power generation systems. Teledyne has
four business segments: Electronics and Communications, Systems
Engineering Solutions, Aerospace Engines and Components and Energy
Systems. Teledyne was recently awarded a multi-million dollar
contract from the U.S. Army Space and Missile Defense Command.
Teledyne will provide an array of technical services in support of
the Command contract including expertise relating to missiles,
optical and radar sensors, targets, command communications, test
and evaluation, lethality, systems integration, information
technology, simulation, and other areas. The company has also
been selected as a strategic subcontractor to Orbital Sciences
Corporation to perform work on ground-based boost vehicles for
America's missile defense program and has reached a favorable
monetary settlement with two of three companies that made and
processed allegedly defective steel later made into aircraft
engine crankshafts. The bullish "break-out" in TDY suggests
further upside activity in the near future.
JUN 20.00 TDY RD LB=0.50 OI=4 CB=19.50 DE=27 TY=7.3%
*****
TTWO - Take-Two Int. Software $25.50 *** Earnings Play! ***
Take-Two Interactive Software (NASDAQ:TTWO) is an integrated
developer, marketer, distributor and publisher of interactive
entertainment software games and accessories for the personal
computer, PlayStation, PlayStation2, Nintendo Game Boy Color,
Nintendo GameCube, Nintendo Game Boy Advance and the Xbox. The
company publishes and develops products through various wholly
owned subsidiaries including Rockstar Games, Rockstar Studios,
Gathering of Developers, TalonSoft, Joytech, PopTop, Global Star
and under the Take-Two brand name. The company maintains sales
and marketing offices in Cincinnati, New York, Toronto, London,
Paris, Munich, Vienna, Copenhagen, Milan, Sydney and Auckland.
Take Two's game sales jumped 79% in the first quarter while net
income quadrupled to $34 million, but an investigation by the
SEC overshadowed the company's success. Apparently, investors
have decided the probe involving revenue recognition in prior
periods will not affect the future because the issue has moved
higher since early April. However, the stock has stalled near
all-time highs on concerns over Take-Two's upcoming earnings
report (due 6/6/02) which will certainly have an effect on its
near-term share value. Traders who think the announcement will
be favorable can profit from that outcome with this position.
JUN 20.00 TUO RD LB=0.30 OI=325 CB=19.70 DE=27 TY=6.3%
*****
WIN - Winn-Dixie Stores $19.20 *** Food Sector Hedge! ***
Winn-Dixie Stores (NYSE:WIN) is a food and drug retailer. The
company operates 1,153 stores in 14 states located primarily in
the southeastern United States and the Bahamas Islands. Winn
Dixie's retail stores sell groceries, meats, seafood, produce,
deli/bakery products, pharmaceutical products and other general
merchandise items, such as magazines, soaps, paper products,
health and cosmetic products, hardware and numerous household
items. In addition, many locations also offer broad lines of
merchandise and services, such as company-operated photo labs
and in-store banks operated by independent third parties that
rent space. Stocks in the food and grocery segment are always
popular when the broader equity markets slump and these issues
are currently performing very well. Traders who want to hedge
their portfolio with a favorable consumer-products stock should
consider this position.
JUN 17.50 WIN RW LB=0.30 OI=106 CB=17.20 DE=27 TY=5.4%
*****
*****************
SUPPLEMENTAL NAKED PUT CANDIDATES
*****************
The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions. As
with any investment, you must decide if the selections meet your
criteria for potential plays. Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook. They will not be included in
the weekly portfolio summary.
Sequenced by Target Yield (monthly basis)
******
Stock Last Call Strike Option Last Open Cost Days Target
Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield
BSTE 31.84 JUN 30.00 BQS RF 1.05 3 28.95 27 9.9%
JBL 22.76 JUN 20.00 JBL RD 0.55 1937 19.45 27 9.0%
CENT 15.38 JUN 15.00 EQH RC 0.50 0 14.50 27 9.0%
MCAF 15.85 JUN 12.50 CFU RV 0.25 89 12.25 27 8.2%
IVGN 35.12 JUN 32.50 IUV RZ 0.85 47 31.65 27 7.8%
CKFR 23.76 JUN 20.00 FCQ RD 0.35 144 19.65 27 6.5%
WSH 31.00 JUN 30.00 WSH RF 0.55 10 29.45 27 5.2%
SEE DISCLAIMER IN SECTION ONE
*****************************
************************
SPREADS/STRADDLES/COMBOS
************************
Just When You Thought It Was Safe, The Bears Return!
By Ray Cummins
******************************************************************
- MARKET RECAP -
******************************************************************
Friday, May 24
Stocks slumped today amid lackluster interest among investors and
ongoing concerns about the economy and future corporate profits.
The Dow Jones Industrial Average plummeted 111 points to 10,104 on
losses in its hi-tech components. SBC Communications (NYSE:SBC),
Hewlett-Packard (NYSE:HPQ), Microsoft (NASDAQ:MSFT), AT&T (NYSE:T),
and Intel (NASDAQ:INTC) accounted for the bulk of the blue-chip
losses. The technology index followed suit with semiconductor
shares leading the NASDAQ Composite 36 points lower to 1,661. In
the broader market, biotechnology, drug, oil service and financial
stocks were plundered while gold remained the standard for market
bulls. Volume was meager with only 887 million shares traded on
the Big Board and 1.17 billion shares changing hands on the NASDAQ.
Market breadth was weak, with decliners trouncing advancers 19 to
12 on the NYSE and 21 to 12 on the technology exchange. The bond
market edged higher in the wake of equity losses with the 10-year
treasury note up 1/32 to yield 5.14% while the 30-year government
bond gained 2/32 to yield 5.67%. On the fund flow front, Trim
Tabs estimated that all equity funds had outflows of $3.8 billion
over the week ending May 22 compared with inflows of $4.0 billion
in the prior week. Equity funds that invest primarily in stocks
had outflows of $1.1 billion compared with inflows of $1.7 billion
in the previous week.
Last week's new plays (positions/opening prices/strategy):
Affiliated (NYSE:ACS) JUN45P/50P $0.55 credit bull-put
Sony Corp. (NYSE:SNE) JUN50P/55P $0.70 credit bull-put
Mercury In. (NSDQ:MERQ) JUN50C/45C $0.50 credit bear-call
Weatherford (NYSE:WFT) JUN60C/55C $0.60 credit bear-call
XL Capital (NYSE:XL) JU100C/95C $0.45 credit bear-call
S&P 100 (CBOE:OEX) J580C/575C $0.50 credit bear-call
S&P 100 (CBOE:OEX) J520P/525P $0.50 credit bull-put
Nvidia (NSDQ:NVDA) JUN40C/40P $7.00 debit straddle
All of our new credit spreads on stocks were available at the
target entry prices with the exception of XL Capital. However,
the position did offer an acceptable opening credit and despite
the rally late in the week, the bearish spread has an excellent
probability of a profitable outcome. The volatile activity in
Monday's early-session trading forced us to adjust both of the
OEX spreads ($5) lower in order to initiate the neutral-outlook
play at a favorable credit. The "Reader's Request" straddle in
Nvidia was very active and the bearish portion of the position
traded near $6, approaching a "break-even" exit during Friday's
session.
Portfolio Activity:
The recent extreme market movements continued this week but even
with the volatile character of equities there was little activity
of significance in the Spreads-Combos portfolio. However, there
was one issue that benefited from the brief rally in major drug
issues. Shire Pharmaceuticals (NASDAQ:SHPGY) soared to a 3-month
high during Friday's session and the upside bias in its shares
produced a favorable early-exit gain (up to $1.10) in the bullish
synthetic position. Another stock in that category, Shaw Group
(NYSE:SGR) also traded at a recent high near the end of the week,
offering a profit of up to $0.75 the bullish play. In the credit
spread section, all of the current plays are profitable and the
rebound in crude prices helped the position in Nabors Industries
(NYSE:NBR) remain in the black. At the same time, the share value
slump among many of the oil service sector issues has negatively
affected our bullish spread in Schlumberger (NYSE:SLB) and the
stock should be monitored closely for further downside activity.
In the premium-selling category, Adobe Systems (NASDAQ:ADBE) has
moved back to the middle of the profit envelope and the effects
of time-value erosion have allowed the neutral-outlook position
to become profitable, well in advance of its expiration in June.
Questions & comments on spreads/combos to Contact Support
******************************************************************
- NEW PLAYS -
One of our long-time readers commented that we have offered very
few debit straddles in recent weeks, so here some new candidates
for traders who favor volatility strategies. All of these issues
have inexpensive option premiums, a history of adequate movement
and the potential for future volatility in the underlying stock
or its industry. Most of these candidates are very speculative
positions, thus traders with a conservative outlook may consider
options with future expiration dates. Also, since the Market is
closed for the Memorial Day holiday, the entry prices may have to
be adjusted to account for the additional time-value erosion.
******************************************************************
AEIS - Advanced Energy $29.88 *** Recent Activity! ***
Advanced Energy Industries (NASDAQ:AEIS) designs, manufactures
and supports a group of subsystems for vacuum process systems.
Their product offerings are classified as direct current, radio
frequency, flow and temperature control products, as well as ion
and plasma sources, and the unique IKOR products that empower
next-generation microprocessors and ASICs. These products are
used in plasma-based thin-film processing equipment essential to
the manufacture of semiconductors; compact disks, DVDs and other
digital storage media; flat-panel PC and television screens;
coatings for architectural glass and optics; and a power supply
for advanced technology computer workstations.
PLAY (speculative - neutral/debit straddle):
BUY CALL JUL-30 OEQ-GF OI=580 A=$3.20
BUY PUT JUL-30 OEQ-SF OI=41 A=$3.30
INITIAL NET DEBIT TARGET=$5.20-$5.25 TARGET PROFIT=25-50%
******************************************************************
BRKS - Brooks-pri Automation $29.89 *** Probability Play! ***
Brooks-PRI Automation (NASDAQ:BRKS), formerly known as Brooks
Automation, Inc., is a supplier of integrated tool and factory
automation solutions for the global semiconductor and related
industries. Brooks is a global supplier of original equipment
manufacturers tool automation and factory management software
for the semiconductor, data storage and flat panel display
manufacturing industries. Brooks' unique hardware and software
automation technologies include vacuum and atmospheric robots,
cluster tool platforms and modules, ultra-clean environments
for isolating processing equipment and wafers, and factory and
tool automation software and integration services. The company
has ISO 9001 certification, is headquartered in Chelmsford,
Massachusetts, and has direct operations in the United States,
Canada, Europe, Japan, Korea, Malaysia, Singapore, Taiwan and
China.
PLAY (very speculative - neutral/debit straddle):
BUY CALL JUN-30 BQE-FF OI=215 A=$2.15
BUY PUT JUN-30 BQE-RF OI=67 A=$2.30
INITIAL NET DEBIT TARGET=$4.20-$4.30 TARGET PROFIT=15-25%
******************************************************************
CTLM - Centillium Comm. $7.66 *** Cheap Speculation! ***
Centillium Communications (NASDAQ:CTLM) delivers products that
enable broadband communications to the home and business. The
company provides broadband equipment vendors with system-level
products for the DSL market, and is leveraging its unique core
technology and expertise to develop products for complementary
markets that share common communications technologies as well
as customers. The company also makes a range of products for
the Voice-over-Packet market and has recently released products
that target the premise networking market.
PLAY (speculative - neutral/debit straddle):
BUY CALL JUL-7.50 UUM-GU OI=74 A=$1.05
BUY PUT JUL-7.50 UUM-SU OI=252 A=$0.90
INITIAL NET DEBIT TARGET=$1.75-$1.80 PROFIT=25-50%
******************************************************************
COGN - Cognos $22.10 *** Earnings Play! ***
Cognos Incorporated (NASDAQ:COGN) is a major provider of business
intelligence software solutions. The company develops, markets,
and supports an integrated business intelligence platform that
allows its customers, as well as their partners, customers, and
suppliers, to analyze and report data from multiple perspectives
and to coordinate decision-making and actions across the extended
enterprise through intranets, extranets, and the Internet. The
company's software is designed to provide its customers with the
ability to effectively use data to make faster, more informed
decisions in order to improve operational effectiveness, increase
customer satisfaction, accelerate corporate response times, and,
ultimately, increase revenues and profits. Cognos' earnings are
due on 6/20/02.
PLAY (very speculative - neutral/debit straddle):
BUY CALL JUN-22.50 CRQ-FX OI=215 A=$1.10
BUY PUT JUN-22.50 CRQ-RX OI=59 A=$1.55
INITIAL NET DEBIT TARGET=$2.40-$2.50 TARGET PROFIT=15-25%
******************************************************************
CVC - Cablevision Systems $20.84 *** Probability Play! ***
Cablevision Systems Corporation ((NYSE:CVC) is a cable operator
in the United States through its wholly owned subsidiary, CSC
Holdings. Cablevision also has investments in cable programming
networks, entertainment businesses and telecom companies. With
Rainbow Media Holdings, the company owns interests in and manages
numerous national and regional programming networks, the Madison
Square Garden sports and entertainment business, and cable TV
advertising sales companies. Through Cablevision Lightpath, the
company offers switched telephone services as well as high-speed
Internet access to the business market. The company also owns or
has interests in a large number of complementary businesses and
companies including The WIZ, a chain of 43 consumer electronics
stores; Clearview Cinemas, a chain of 59 theaters; and Northcoast
Communications, LLC, a wireless personal communications services
business.
PLAY (speculative - neutral/debit straddle):
BUY CALL JUL-20 CVC-GD OI=1044 A=$3.00
BUY PUT JUL-20 CVC-SD OI=21 A=$2.05
INITIAL NET DEBIT TARGET=$4.75-$4.85 TARGET PROFIT=30-50%
******************************************************************
JNPR - Juniper Networks $10.08 *** Big Move Coming? ***
Juniper Networks (NASDAQ:JNPR) is a provider of purpose-built
Internet infrastructure solutions that meet the scalability,
performance, density and compatibility requirements of rapidly
evolving, optically enabled Internet Protocol networks. Unlike
conventional network routers that were originally developed for
enterprise applications, Juniper's products are specifically
designed, or purpose-built, for service provider networks and to
accommodate the size and scope of the Internet. The company's
next-generation Internet backbone routers offer its customers
increased reliability, performance, scalability, interoperability
and flexibility. The company's products combine high-performance,
ASIC-based packet-forwarding technology, the unique features of
the JUNOS Internet software and a Internet-optimized architecture
into a purpose-built solution for the service provider market.
PLAY (speculative - neutral/debit straddle):
BUY CALL JUL-10 JUX-GB OI=4621 A=$1.35
BUY PUT JUL-10 JUX-SB OI=3729 A=$1.25
INITIAL NET DEBIT TARGET=$2.30-$2.40 TARGET PROFIT=25-50%
******************************************************************
MYL - Mylan Laboratories $30.34 *** Active Drug Sector! ***
Mylan Laboratories (NYSE:MYL) is engaged in creating, licensing,
manufacturing, selling and distributing generic and brand-name
pharmaceutical products. The company conducts business through
two primary businesses; the generic (Generic Segment) and branded
(Brand Segment) pharmaceutical operating segments. Mylan sells
its products primarily to proprietary and ethical pharmaceutical
wholesalers and distributors, drug stores, drug manufacturers,
institutions and governmental agencies within the United States.
The company's Generic Segment consists of two principal business
units, Mylan Pharmaceuticals and UDL Laboratories. Mylan's Brand
Segment operates principally through its wholly owned subsidiary,
Bertek Pharmaceuticals.
PLAY (speculative - neutral/debit straddle):
BUY CALL JUL-30 MYL-GF OI=1120 A=$1.65
BUY PUT JUL-30 MYL-SF OI=597 A=$1.30
INITIAL NET DEBIT TARGET=$2.75-$2.80 TARGET PROFIT=25-50%
******************************************************************
WMB - Williams Companies $17.42 *** Active Oil Issue! ***
Williams Companies (NYSE:WMB) is engaged in the transportation
and sale of natural gas and petroleum products and other energy
related activities. The company, through its subsidiaries, is
engaged in price risk management services; the purchase, sale
and arranging of transportation or transmission of energy and
energy-related commodities; transportation and storage of natural
gas; exploration, production and marketing of oil and gas; direct
investments in international energy projects as well as energy
infrastructure development funds and soda-ash mining operations;
natural gas gathering, treating and processing activities; gas
and liquids transportation; transportation of petroleum products
and related terminal services; hydrocarbon/olefin transportation;
ethylene production; production and sale of ethanol and various
bio-products; refining of petroleum products; retail marketing;
petroleum products terminal services, and ammonia transportation
and terminal services.
PLAY (speculative - neutral/debit straddle):
BUY CALL JUL-17.50 WMB-GW OI=182 A=$1.40
BUY PUT JUL-17.50 WMB-SW OI=43 A=$1.65
INITIAL NET DEBIT TARGET=$2.75-$2.80 TARGET PROFIT=25-50%
******************************************************************
WON - Westwood One $39.48 *** Media Industry Volatility! ***
Westwood One (NYSE:WON) supplies radio and television stations
with information services and programming. Westwood One's main
source of revenue is selling commercial airtime to advertisers
through one of its two primary operating divisions, which are
Metro/Shadow, which is comprised of Metro Networks, and Shadow
Traffic, and the Network Division. Westwood generates revenue
by selling audience it obtains from radio and TV affiliates to
local and national advertisers. Metro/Shadow provides traffic
and information broadcast reports in over 80 Metro Survey Area
markets in the United States. The Network Division offers radio
stations traditional news services, CBS Radio news, CNN Radio
and Fox news, in addition to seven 24-hour satellite-delivered
continuous play music formats and weekday and weekend news and
entertainment features and programs.
PLAY (conservative - neutral/debit straddle):
BUY CALL OCT-40 WON-JH OI=424 A=$3.20
BUY PUT OCT-40 WON-VH OI=100 A=$3.50
INITIAL NET DEBIT TARGET=$6.30-$6.50 TARGET PROFIT=50-75%
******************************************************************
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**************************************************************
************
MARKET WATCH
************
The holiday shortened session next week may bring some surprise
volatility. We will take movement in either direction.
To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/052602.asp
**************
MARKET POSTURE
**************
Minimal movement generally portends volatility. We will see what
happens next week.
To Read The Rest of The OptionInvestor.com Market Posture Click Here
http://www.OptionInvestor.com/marketposture/052602_1.asp
**********
DISCLAIMER
**********
Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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